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Economics Professor: Negative Interest Rates Aimed at Driving Small Banks Out of Business and Eliminating Cash
GeorgeWashington.com
Feb. 9, 2016
More than one-fifth of the world’s total GDP is in countries which have imposed negative interest rates, including Japan, the EU, Denmark, Switzerland and Sweden.
Negative interest rates are spreading worldwide.
And yet negative interest rates – supposed to help economies recover – haven’t prevented Japan and Europe’s economies from absolutely going down the drain.
Nor have they even stimulated spending. As ValueWalk points out:
Japan has had ultra-low rates for years and its economy has been terrible. Trillions of debt in Europe now trades at negative interest rates and its economy isn’t exactly booming. Denmark, Sweden and Switzerland all have negative interest rates, but consumer spending isn’t going up there. In fact, savings rates have been going up in lockstep with the decrease in interest rates, exactly the opposite of what the geniuses at the various central banks expected.
Why is this happening? Simply, savers are scared. Lower interest rates have wrecked their retirement plans. Say you were doing some financial planning 10 years ago and plugged in 3% from your savings account. Now its 0%. You still have to plan for your retirement. Plug in 0%. What happens to your planning now? 0% compounded for X years is 0%. The math is simple. So in order to have your target savings at retirement, you need to save more, not spend more. But for some reason, the economists that run central banks around the world can’t see this. They are all stuck in their offices talking to one another and self-reinforcing this myth that they can drive spending up by reducing the rate of return on investments. Want to see consumer spending go up? Don’t wreck their savings plans so that they are too scared to spend. But that’s too simple. Instead, central banks use a chain of causation that doesn’t exist to try to create change 3 or 4 steps down the line. It hasn’t worked, and it won’t work. It isn’t in an individual’s self-interest to go out and spend their money on more “stuff” in order to spur economic growth.
So what’s really going on? Why are central banks worldwide pushing negative interest rates?
Economics professor Richard Werner – the creator of quantitative easing – notes:
The experience of Switzerland [shows that] negative rates raise banks’ costs of doing business. The banks respond by passing on this cost to their customers. Due to the already zero deposit rates, this means banks will raise their lending rates. As they did in Switzerland. In other words, reducing interest rates into negative territory will raise borrowing costs!
If this is the result, why do central banks not simply raise interest rates? This would achieve the same result, one might think. However, there is a crucial difference: raised rates will allow banks to widen their interest margin and make their business more profitable. With negative rates, banks’ margins will stay low and the financial situation of the banks will stay precarious and indeed become ever more precarious.
As readers know, we have been arguing that the ECB has been waging war on the ‘good’ banks in the eurozone, the several thousand small community banks, mainly in Germany, which are operated not for profit, but for co-operative members or the public good (such as the Sparkassen public savings banks or the Volksbank people’s banks). The ECB and the EU have significantly increased regulatory reporting burdens, thus personnel costs, so that many community banks are forced to merge, while having to close down many branches. This has been coupled with the ECB’s policy of flattening the yield curve (lowering short rates and also pushing down long rates via so-called ‘quantitative easing’). As a result banks that mainly engage in traditional banking, i.e. lending to firms for investment, have come under major pressure, while this type of ‘QE’ has produced profits for those large financial institutions engaged mainly in financial speculation and its funding.
The policy of negative interest rates is thus consistent with the agenda to drive small banks out of business and consolidate banking sectors in industrialised countries, increasing concentration and control in the banking sector.
It also serves to provide a (false) further justification for abolishing cash. And this fits into the Bank of England’s surprising recent discovery that the money supply is created by banks through their action of granting loans: by supporting monetary reformers, the Bank of England may further increase its own power and accelerate the drive to concentrate the banking system if bank credit creation was abolished and there was only one true bank left – the Bank of England. This would not only get us back to the old monopoly situation imposed in 1694 when the Bank of England was founded as a for-profit enterprise by private profiteers. It would also further the project to increase control over and monitoring of the population: with both cash and bank credit alternatives abolished, all transactions, money creation and allocation would be implemented by the Bank of England.
If this sounds like a “conspiracy theory”, the Financial Times argued in 2014 that central banks would be the real winners from a cashless society:
Central bankers, after all, have had an explicit interest in introducing e-money from the moment the global financial crisis began…
***
The introduction of a cashless society empowers central banks greatly. A cashless society, after all, not only makes things like negative interest rates possible, it transfers absolute control of the money supply to the central bank, mostly by turning it into a universal banker that competes directly with private banks for public deposits. All digital deposits become base money.
http://www.zerohedge.com/blogs/george-washington
Real Estate in Real Terms
Armstrong Economics
Feb 20, 2016
INQUIRY:
Dear Marty,
When talking about negative interest rates and a shift of cash from banks to the stock market from 2017, would that not mean that cash may also shift to property and other assets? Yet I thought that we have seen the high in the property market already?
ANSWER:
Real estate has peaked in REAL TERMS. The sub-prime market that made the high in 2007 was not exceeded. The secondary rally into 2015 was the high-end, so we now have the IRS targeting NYC and Miami in their hunt for money.
The high-end will now decline. The average home will make the transition, but will not be making new highs. In real terms, the high is in. Real estate varies tremendously based upon location. This is due to capital inflows that drive certain markets like Vancouver and Toronto in Canada or New York and Miami in the States. Washington, D.C., held up in 2007-2009 because politicians did not want to lose their jobs. Taxes will also prevent real estate from reaching new highs in “real terms.”
In nominal terms, some areas will make the transition to new currencies; the movable assets will appreciate the most. Those are the assets that you do not have make annual payments on to hold them annually.
We also have a collapse in long-term interest rates to the point that banks do not want to write 30-year mortgages anymore. As that long-term view collapses, so does the leverage. That will cause housing to decline in “real terms.”
https://www.armstrongeconomics.com/markets-by-sector/real_estate/real-estate-in-real-terms/
The US Economy's Problem Summed Up In 1 Simple Chart
02/09/2016
Too much mal-invested, Fed-fueled, hope-driven "if we build it, they will buy it" inventory... and not enough actual demand. This has never, ever, ended well in the past - so why is this time different?
At 1.32x, the December inventories/sales ratio is drasticallyhigher than at year-end 2014 and is back at levels that have always coincided with recessions...
And just in case you needed more convincing that all is not well - the current spread between sales and inventories is now at a record absolute high...
As Sales tumble and inventories continue to rise...
And all because The Fed (ZIRP) and Government (Subsidies) are breathing life into Zombies when they should be dead and gone.
http://www.zerohedge.com/news/2016-02-09/us-economys-problem-summed-1-simple-chart
US Investment Grade Credit Risk Spikes To 5-Year Highs
02/09/2016
When it rains it pours...
The market has taken over The Fed's role - forget above 25bps here or there, the cost of funding for even the highest quality US Corporates is exploding...
Simply put, the credit cycle has turned and is accelerating rapidly - crushing any hopes for debt-funded shareholder-friendliness.
http://www.zerohedge.com/news/2016-02-09/us-investment-grade-credit-risk-spikes-5-year-highs
A Key Technical Indicator Just Rang The Bell On The Cyclical Bull Market
by ZeroHedge
February 5, 2016
While the primary topic of Albert Edwards’ most recent note is the question how long China can sustain its FX intervention before tapping out and letting the hedge funds win with their short Yuan bets once total reserves drop below the critical redline of $2.7 trillion (the answer incidentally is between 5 months and 10 months assuming monthly reserve burn rates of $130BN to $60BN), we will skip that part as we have discussed it extensively in the past, and instead will fast forward to some chart porn by the SocGenarian.
Here is Albert Edwards showing that the S&P had breached key moving averages normally seen at the start of a bear market.
Back in the mid-1990s I spent three memorable years working at Bank America Investment Management, among some of the industry’s finest. Having previously spent three years as an economist at the Bank of England, I was new to markets and I let my economic enthusiasm often get the better of me when making recommendations to fund managers.
I remember the head of fixed income explaining to me it was far better not to try and pick market tops or bottoms but to wait and observe the market turn, making the trade late rather than prematurely trying to pick the bottom or top.
So the chart below is notable, showing that key 200d and 320d moving averages for the S&P have just been breached to the downside. If one is looking for key technical indicators to ring the bell on the cyclical bull market- maybe it has just rung loud and clear.
A renminbi devaluation will only sever an already badly frayed safety rope.
http://www.zerohedge.com/news/2016-02-05/key-technical-indicator-just-rang-bell-cyclical-bull-market
Something This Way Wicked Comes—–A Deep Dive Into The Market Charts
by Lance Roberts
February 6, 2016
Last week, I discussed the boost the market received as the BOJ made an unexpected move into negative interest rate territory combined with end of the month buying by portfolio managers. To wit:
“However, the announcement by the Bank of Japan (BOJ) to implement negative interest rates in a desperate last attempt to boost economic growth in Japan was only the catalyst that ignited the bulls. The “fuel” for the buying came from the end of the month portfolio buying by fund managers.”
But more importantly, was the push higher by stocks that I have been discussing with you over the last couple of weeks. To wit:
“Over the last few weeks, I have suggested the markets would likely provide a reflexive rally to allow investors to reduce equity risk in portfolios. This was due to the oversold condition that previously existed which would provide the “fuel” for a reflexive rally to sell into.
I traced out the potential for such a reflexive rally two weeks ago as shown in the chart below.”
Previous Chart
As I stated then, the most important parts of the chart above are the overbought / oversold indicators at the top and bottom. The oversold condition that once existed has been completely exhausted due to the gyrations in the markets over the last couple of weeks. This leaves little ability for a significant rally from this point which makes a push above overhead resistance unlikely.
“Just as an oversold condition provides the necessary “fuel” for an advance, the opposite is also true.”
Here is the problem. I have updated the chart above through Friday’s close.
The rally failed at the previous reflex rally attempt during the late December/January plunge. This failure now cements that high point as resistance. Furthermore, the market continues to fail almost immediately when overbought conditions are met (red circles), which suggests that internals remain extraordinarily weak.
HEAD & SHOULDERS – NOT JUST DANDRUFF
The good news, if you want to call it that, is that the market is currently holding above the recent lows as short-term oversold conditions once again approach. It is critically important that the market holds above that support, which is also the neckline of the current “head and shoulders” formation, as a break would lead to a more substantive decline.
However, this isn’t the first time that we have seen a “head and shoulders” topping pattern form COMBINED with a long-term major sell signal as shown above. I emphasize this point because many short-term technicians point out “head and shoulders” formations that consistently do not lead to more important declines. However, when this topping process combines with enough deterioration in the markets to issue long-term “sell signals,” it is something worth paying attention to.
The first chart shows the same development in 2000.
And again in 2007.
These are the only two points since the turn of the century where a topping process was combined with a long-term sell signal.
It is important to note that in both previous cases the markets did provide one last chance to exit before a more substantiative decline ensued. This is because by the time the market has declined enough to break the neckline, sellers have been temporarily exhausted. This allows the market to rise enough to test previous resistance where “sellers” once again emerge.
It is very likely that if, or when, the market breaks current neckline support, individuals will be given one last chance to exit the markets for safer ground. A failure to do so has previously been the start of the “trail of tears.”
PREDICTING OR PAYING ATTENTION?
Last night I gave a presentation to a group of doctors discussing the economy, the markets and what is most likely to come over the next few months.
One of the questions I was asked during the Q&A section was:
“How can you be so sure that you are right? No one can time the market?”
It is an interesting question, and one that I have been asked before. If you scroll down to the bottom of this report you will see a chart of the S&P 500 with the history of portfolio adjustments over time. You could call this timing, however, I prefer to call this risk management.
For me, “timing the market” is trying to be “all in” or “all out.” If you try and do that playing poker you are eventually going to go broke.
However, a good poker player understands the “risk of losing” given the particular hand that he is dealt. He will bet much heavier given a “full house” versus a “pair of deuces.” However, even given a great hand, a good poker player reads the other players at the table and adjusts his bets accordingly.
The same is true when it comes to managing your portfolio. While you may have a “great hand of stocks,” you must read the rest of the players in the market. If they are all buying or selling, what do they know that you possibly don’t.
So, that brings me to the question above. I am NOT sure that I am right.
However, since last May I have held exposure in portfolios to 50% of normal equity allocations because the price trends of the market have been deteriorating. Furthermore, they continue to do so which is leading me to reduce allocations even more (see next section.)
Am I predicting a major market decline? NO. However, I am suggesting that given the current weight of evidence that one may very likely already be in process. The chart below is a MONTHLY chart of market indicators that measure a variety of market internals. Currently, every single measure is registering a “SELL” signal which has only occurred during the previous two bull market cycles.
Now, you can certainly make the case for why “this time is different.” However, if you are a good poker player, should you really be betting heavily given the current hand?
Even if correction only reverts back to the previous peaks of the past two bull markets, such would entail an additional decline of 18% from current levels, or 27% from the previous peak. Such a correction would just about meet the average draw down of a bear market cycle throughout history as shown in the table below.
ary. I’ve gone through many of them, having started my career in investment management just two months before the 1987 crash.
While different circumstances led to each one, the fundamental aspect of a correction (or even a bear market) is that the market simply reprices securities to better match the underpinnings of an investment as they currently are.
Sometimes, this may happen because of a recession, which we do not think is the most likely scenario, but in many other cases, it’s simply because stocks got a little ahead of themselves. Right now, stocks in the S&P 500 are more expensive relative to their earnings than they historically have tended to be, according to Ned Davis Research. That means that investors bid up share prices more than (or perhaps one might even venture to say “earlier than”) they should have. In that sense, a correction is just that: “correcting” a stock’s value to what the earnings and net worth of the company in question should dictate.”
This really goes to the root of why I am so fed up with the financial advisory industry as a whole. Let me translate the above for you.
“We don’t really manage your money. What we do is encourage you to buy some stuff and then sit on it so we can charge you a fee.
When prices decline, because we don’t really pay attention to the markets, we have to send out an excuse letter to keep you from transferring your money to another advisor who actually pays attention to what is going on.
Even though we knew stocks were overvalued, and such overvaluation leads to corrective cycles in the market, we really didn’t think about selling stocks to reduce the risk of loss. We are too busy trying to get other people to invest money with us. The more the better.
We hope you understand, but our revenue line is more important than yours. Oh, and please deposit more money in your account because dollar cost averaging works better for us than you.”
I realize that is a bit harsh, but I want to make a point. I know some really great advisors that work extremely hard for the clients, manage risk and try to ensure their clients reach their goals. If you ever read a site like Seeking Alpha, you will see a lot of them. Then there are these guys which give the rest of the industry a bad name.
Let me be clear with you. YES, it is time to worry, and it may be time to worry a lot.
If I am wrong, and the markets turn around, we can ALWAYS buy stuff and sit on it again. But now is not that time.
Apparently, if you don’t take some action with respect to the risk in your portfolio, no one else is going to either.
THE MONDAY MORNING CALL
As stated above, the market bounce failed much sooner than anticipated. This changes the tone of the market to substantially more bearish.
As shown in the chart below, on a very short-term basis the market is oversold and once again suggests the markets could get some buying early next week. However, they are also on the verge of breaking critical support.
I continue to suggest taking actions to reduce risk in portfolios by taking the following actions on ANY RALLIES:
Trim back winning positions to original portfolio weights: Investment Rule: Let Winners Run
Sell positions that simply are not working (if the position was not working in a rising market, it likely won’t in a declining market.) Investment Rule: Cut Losers Short
Hold the cash raised from these activities until the next buying opportunity occurs. Investment Rule: Buy Low
One other point. The two moving averages in the chart above are the 200-day and 400-day. As you will notice they are about to cross. Because these two moving averages are so long in nature, THEY WILL CROSS. It is now inevitable UNLESS the market immediately reverses to a runaway stampede higher.
This “real death cross” was brought to my attention earlier this week by a loyal reader:
“Most identify the death cross as when the 50-day moving average breaks below the 200-day moving average on the S&P 500. However, the real death cross takes place when the 200-day moving average crosses below the 400. In 13 of the last 18 major correction episodes going back 1920- 72% this crossover marked the onset of a major Bear market.
In the five exceptions, which were 1953, 1990, 1984, 1987, and 1996, the same crossover actually ended the correction at that time. Importantly, these five episodes were during strongly trending SECULAR bull market cycles. Given we are not currently in one of those periods, it is likely a cross-over now would be more related to each of the market failures since the turn of the century.”
As I stated above, I am not “predicting” anything. What I am doing is suggesting that current trends, based on historical precedents, suggests that “something wicked this way comes.”
http://davidstockmanscontracorner.com/something-this-way-wicked-comes-a-deep-dive-into-the-market-charts/
The Cozy Relationship Between The Treasury And The Fed
Submitted by David Howden via The Mises Institute,
02/04/2016
Last year was a tough one for investors. Gold was down 10 percent. The Dow Industrials fell 2.5 percent, and most bond indexes finished down by at least that much.
One institution that performed remarkably well in 2015 was the Federal Reserve. It just finished its most profitable year on record. The $100 billion in net income earned last year was a slight improvement over the previous year. That total was also roughly three times higher than the Fed’s income from 2007, the last year before it initiated its Quantitative Easing programs in the wake of the financial crisis.
Since the Fed does not exist to generate profits, some may be confused as to how it could have such a great year at doing so.
Here’s how it works. Every time the Fed expands the money supply it buys an asset. Typically the asset is a financial security, like a US Treasury bond, and the counterparties are typically large banks. Figure 1 gives a simplified look at the Fed’s balance sheet at the end of 2015 and how it evolved over the year:
Compared to previous years, 2015 was relatively uneventful at the Fed. Having completed the tapering of its Quantitative Easing programs in October 2014, the Fed’s asset holdings held constant over the year. This was in stark contrast to the previous six years, during which the Fed purchased $3.5 trillion of assets. The Fed earns interest on its assets but most of its liabilities are non-interest bearing, like the $1.4 trillion worth of Federal Reserve notes crumpled in people’s pockets or buried under our mattresses. The Fed does pay interest on Reserve Bank balances, but at the current rate of 0.5 percent, this figure was a drop in the bucket relative to its total income. (Almost all of the Fed’s assets earn interest, while it incurs an interest expense on less than half of its liabilities.
What Does the Fed Do With All That Income?
The question that arises is what the Fed does with its profits.
Each year, the Fed remits to the US Treasury its net income, and thus provides the federal government with an important source of funding. Figure 2 shows how this figure has evolved since 2001.
A decade ago, back when the Fed was a smaller size, Fed remittances were fairly steady, in the neighborhood of $20 billion a year. This all changed after 2008 as the Fed’s Quantitative Easing programs increased the amount of interest-earning assets that would generate funds to transfer back to the Treasury. This year’s figure of $97.7 billion is more than four times the amount transferred just ten years ago, an annual growth rate of more than 16 percent. (At least something is growing quickly in this economy.)
Big Bucks for the US Treasury
For the US Treasury, Fed remittances are something of a free lunch. When someone buys a Treasury bond, the government must pay them interest. This applies to the Fed as well, but then at year-end the Fed remits the interest back to the Treasury.
The federal government paid out $223 billion in interest payments last year. The Fed remitted almost $100 billion back, leaving the net interest expense at around $125 billion. It’s not just historically low interest rates that are making it easier for the Treasury to borrow in a way that, if it were done by anyone else, would classify them as subprime. The Fed is also chipping in and helping out where it can.
Also shown in figure 2 is the percentage of the federal interest expense that is remitted back by the Fed. For 2015, this figure neared 45 percent. That figure is a good way to think about the free lunch that the Fed gives to the Treasury.
In more “normal” times (i.e., prior to 2008) around 10 to 15 percent of the Treasury’s interest payments were paid back to it by the Fed. This figure has grown to almost four times that amount over the past seven years and it doesn’t look likr this trend will abate anytime soon.
Implications for Fed “Independence”
As much as economists talk about the independence that the Fed holds from Congress, these remittances represent a strong link. In fact, since they enable federal spending they create a form of quasi-fiscal policy for the Fed to use, in addition to its more common monetary policy options.
Consider that since Treasury debt is almost never repaid in net terms (old issues are retired but replaced with new debt issuances), the true cost of financing the US government’s borrowing is not the gross amount of debt outstanding but the annual interest expense it faces. Viewed this way, nearly half of the Treasury’s borrowing was financed by the Fed last year. Absent these Fed remittances, Congress would need to look at either an alternative funding source (though I am not sure how many takers there are for the Fed’s $2.5 trillion Treasury holdings) or make some serious cuts.
How serious? NASA’s operating budget was roughly $18 billion last year, so a lack of Fed remittances would cause the Treasury to cut around five NASA-sized programs. Alternatively, the governments Supplemental
Nutrition Assistance Program (previously known as “food stamps”) cost $70 billion in 2014. Without the Fed’s remittances, Congress would have to stop paying out all food stamp recipients plus it would be forced to defund almost two NASAs.
More important in many Americans’ hearts is their monthly social security check. In 2014, $830 billion of social security checks were mailed out. Without Fed remittances, retirees might see their monthly check cut by about 12 percent.
For those concerned with the burgeoning size of the federal government, putting a stop to Fed remittances would put a serious dent in public finances and force some serious thought as to what programs need to be cut.
http://www.zerohedge.com/news/2016-02-04/cozy-relationship-between-treasury-and-fed
When Mother Market Force Takes Over Central Banking! Watch Rates Rise Even Though the Fed Doesn't
by Reggie Middleton
02/04/2016
CNN reports the US running out of space to store oil.
At the same time, OPEC actually ramps up oil production...
oil pricesOPEC oil supply
Many "smart guys" allege that the drop in oil is bad for the ecomomy. I call BS. Oil prices are an input costs. Input costs are what strip revenues down to profits and potentially losses. The lower the input cost, the higher profit. What has occured was a decades long credit bubble that fueld a profligate binging on debt.
It is hard to get off of that drug called free money, particuarly as your dope pusher (those that push rates outside of market force bounds) continues to give you more of that smack. The problem is, eventually, it will catch up to you. The Central Banks have signaled higher rates, and have raised rates 25 bp (roughly 2% of retracement - whoo hoo!).
The market (well, the fed funds rates futures, not the market per se) is quite skeptical on the Fed raising rates any time soon. So am I, as you have seen above.
Alas, as rates scrape against the zero barrier for sometime now, and break through towards negative, the party is over and the punchbowl is being removed by the grownups, aka the natural market forces. The Financial Times reports:
The sharp drop in commodity prices and a rising expectation of defaults by highly indebted companies have shaken investors and closed the door on new debt sales. Investors say the dearth of liquidity has made it even more difficult to own paper rated triple C. Late last year several bond funds closed that held high amounts of low-rated and unrated debt.
“You are seeing a lack of appetite in the new issue market for these types of issuers,” said Matthew Mish, credit strategist with UBS. “[Funds] have outflows and the Federal Reserve is no longer printing money.
Portfolio managers are also experiencing a wave of redemptions from investors. US junk bond mutual and exchange traded funds have counted more than $20bn of withdrawals since mid-November, according to Lipper.
You know what that means. Those oil producers with higher than OPEC costs and high yield debt financing are GUARANTEED to meltdown as oil drops below their breakeven costs (I'd wager somewhere around $50 - $60/bbl if I was a betting man), and stays there. Recent financial reporting seems to corroborate this hunch...
“We expect a shakeout this year in the US oil and gas market, as highly leveraged companies will be forced to declare bankruptcy,” said Bronka Rzepkowski, an economist with Oxford Economics.
A Q&A: Using Veritaseum to take positions in energy companies through multiple markets. Please be aware that Veritaseum is currently in beta, and the current Java client will be deprecated in lieu of a ubiquitous HTML5 client by the end of the quarter. The info below is for illustrative purposes only.
How do I enter the trade via Veritaseum? Am I using the web client? My own client that consumes Veritaseum APIs? Place the trade over the phone / fax with Veritaseum’s sales team?
If you are an advanced player you can simply go to our site and conduct the trade yourself using the system and/or your own network to find a counterparty.
As an institution, you can purchase Veritas (ex. $50,000 blocks) to redeem them for advisory services such as setting up trades and finding bespoke counterparties.
Large institutions with their own IT infrastructure can integrate Veritaseum into their system via API. This can also entail a Veritas purchase to assist in the integration, customizations and feature requests.
Where does the counterparty for the trade come from?
Japan is the largest consumer of Kuwaiti oil, followed by India, Singapore, and South Korea. Since Asia is such a large consumer of OPEC oil in general (and Kuwaiti oil in particular), they can be very aggressive in their purchasing terms, resulting in material concessions from the oil (and risk) producers - the most painful of which are price discounts. We can offer the oil consumers in these markets the ability to directly hedge their purchase risks - both in terms of currency and oil price fluctuation (or oil price volatility, as illustrated above) accentuating the benefits of discounts while simultaneously making discounts potentially less painful by hedging risks for the oil (risk) producers. Their (the Asian companies) purchase of said risks is the counterpart of the sale of the risk from KOC. The oil refineries of Japan, India, Singapore, and South Korea are the most likely potential counterparties but you can also include the money center banks within these countries, not not to mention the major hedge and trading funds and corporations who consume the finished product en masse. Remember, the USD component of the swap can easily be replaced with the Japanese yen, Chinese Remnibi/yuan, Indian rupee or the Korean won.
This same chart expressed in USD shows where the hedge benefits, particularly in December…
Entities that aren’t exposed to the Kuwaiti Dinar can still benefit by buying the oil risk and selling their local currency with Veritaseum via a separate swap. The Kuwaiti dinar can also be substituted for Saudia Arabian native currency, or Iraqi dinars, etc.
Who are the specific counterparties (consumers) of OPEC (producer, of which Kuwait is a major member) oil risk?
A joint venture between PetroChina Co. (Chinese), Aramco (Saudi Arabian) and Yunnan Yuntianhua Co. (Chinese) is currently building a 260,000 barrel-a-day refinery in the southwest of the Asian nation.
Aramco already manages a 280,000 barrel-a-day refinery and petrochemical complex in China’s Fujian province along with China Petroleum & Chemical Corp., known as Sinopec, and Exxon Mobil Corp.
China is the largest oil consumer after the U.S.
IF you are interested in finding about more about this new way of accessing exposure and laying off risk, read the Pathogenic Finance research report, then contact me at reggie AT veritaseum.com.
Here are the highlights from the report in this most excellent interview with Max Keiser of RT's Kesier Report.
http://www.zerohedge.com/news/2016-02-04/when-mother-market-force-takes-over-central-banking-watch-rates-rise-even-though-fed
Another Nail In The US Empire Coffin: Collapse Of Shale Gas Production Has Begun
SRSroccoReport.com
Feb. 2, 2016
The U.S. Empire is in serious trouble as the collapse of its domestic shale gas production has begun. This is just another nail in a series of nails that have been driven into the U.S. Empire coffin.
Unfortunately, most investors don’t pay attention to what is taking place in the U.S. Energy Industry. Without energy, the U.S. economy would grind to a halt. All the trillions of Dollars in financial assets mean nothing without oil, natural gas or coal. Energy drives the economy and finance steers it. As I stated several times before, the financial industry is driving us over the cliff.
The Great U.S. Shale Gas Boom Is Likely Over For Good
Very few Americans noticed that the top four shale gas fields combined production peaked back in July 2015. Total shale gas production from the Barnett, Eagle Ford, Haynesville and Marcellus peaked at 27.9 billion cubic feet per day (Bcf/d) in July and fell to 26.7 Bcf/d by December 2015:
As we can see from the chart, the Barnett and Haynesville peaked four years ago at the end of 2011. Here are the production profiles for each shale gas field:
According to the U.S. Energy Information Agency (EIA), the Barnett shale gas production peaked on November 2011 and is down 32% from its high. The Barnett produced a record 5 Bcf/d of shale gas in 2011 and is currently producing only 3.4 Bcf/d. Furthermore, the drilling rig count in the Barnett is down a stunning 84% in over the past year.
The Haynesville was the second to peak on Jan 2012 at 7.2 Bcf/d per day and is currently producing 3.6 Bcf/d. This was a huge 50% decline from its peak. Not only is the drilling rig count in the Haynesville down 57% in a year, it fell another five rigs this past week. There are only 18 drilling rigs currently working in the Haynesville.
The EIA reports that shale gas production from the Eagle ford peaked in July 2015 at 5 Bcf/d and is now down 6% at 4.7 Bcf/d. As we can see, total drilling rigs at the Eagle Ford declined the most at 117 since last year. The reason the falling drilling rig count is so high is due to the fact that the Eagle Ford is the largest shale oil-producing field in the United States.
Lastly, the Mighty Marcellus also peaked in July 2015 at a staggering 15.5 Bcf/d and is now down 3% producing 15.0 Bcf/d currently. The Marcellus is producing more gas (15 Bcf/d) than the other top three shale gas fields combined (12.1 Bcf/d).
I have posted the Haynesville shale gas production chart below to discuss why U.S. Shale Gas production will likely collapse going forward:
What is interesting about the Haynesville shale gas field, located in Louisiana and Texas, is the steep decline of production from its peak. On the other hand, the Barnett (chart above in red) had a much different profile as its production peak was more rounded and slow. Not so with the Haynesville. The decline of shale gas production at the Haynesville was more rapid and sudden. I believe the Eagle Ford and Marcellus shale gas production declines will resemble what took place in the Haynesville.
All you have to do is look at how the Eagle Ford and Marcellus ramped up production. Their production profiles are more similar to the Haynesville than the Barnett. Thus, the declines will likely behave in the same fashion. Furthermore drilling and extracting shale gas from the Haynesville was a “Commercial Failure” as stated by energy analyst Art Berman in his Forbes article on Nov 22 2015:
The Haynesville Shale play needs $6.50 gas prices to break even. With natural gas prices just above $2/Mcf (thousand cubic feet), we question the shale gas business model that has 31 rigs drilling wells in that play that cost $8-10 million apiece to sell gas at a loss into a over-supplied market.
The Haynesville Shale play needs $6.50 gas prices to break even. With natural gas prices just above $2/Mcf (thousand cubic feet), we question the shale gas business model that has 31 rigs drilling wells in that play that cost $8-10 million apiece to sell gas at a loss into a over-supplied market.
At $6 gas prices, only 17% of Haynesville wells break even (Table 3) and approximately 115,000 acres are commercial (Figure 2) out the approximately 3.8 million acres that comprise the drilled area of the play.
The Haynesville Shale play is a commercial failure. Encana exited the play in late August. Chesapeake and Exco, the two leading producers in the play, both announced significant write-downs in the 3rd quarter of 2015.
Basically, the overwhelming majority of the shale gas extracted at the Haynesville was done so at a complete loss. So, why do they continue drilling and producing gas in the Haynesville?
The reason Art Berman states is this:
What we see in the Haynesville Shale play are companies that blindly seek production volumes rather than value, and that care nothing for the interests of their shareholders. The business model is broken. It is time for investors to finally start asking serious questions.
Chesapeake is one of the larger shale gas producers in the Haynesville as well as in the United States. According to its recent financial reports, Chesapeake received $1.05 billion in operating cash in the first three-quarters of 2015, but spent $3.2 on capital expenditures to continue drilling. Thus, its free cash flow was a negative $2.1 billion in the first nine months of 2015. And this doesn’t include what it paid out in dividends.
The same phenomenon is taking place in other companies drilling for shale gas in the other fields in the U.S. This insanity has Berman perplexed as he states this in another article from his site:
This has puzzled me because the shale gas plays are not commercial at less than about $6/mmBtu except in small parts of the Marcellus core areas where $4 prices break even. Natural gas prices have averaged less than $3/mmBtu for the first quarter of 2015 and are currently at their lowest levels in more than 2 years.
The reason these companies continue to produce shale gas at a loss is to keep generating revenue and cash flow to service their debt. If they cut back significantly on drilling activity, their production would plummet. This would cause cash flow to drop like a rock, including their stock price, and they would go bankrupt as they couldn’t continue servicing their debt.
Basically, the U.S. Shale Gas Industry is nothing more than a Ponzi Scheme.
The Collapse Of U.S. Shale Gas Production Even At Higher Prices
I believe the collapse of U.S. shale gas production will occur even at higher prices Why? Because the price of natural gas increased from $2.75 mmBtu in 2012 to $4.37 mmBtu in 2014, but the drilling rig count continued to fall:
As the price of natural gas increased from 2012 to 2014, gas drilling rigs fell 40% from 556 to 333. Furthermore, drilling rigs continued to decline and now are at a record low of 127. Just as Art Berman stated, the average break-even for most shale gas plays are $6 mmBtu, while only a small percentage of the Marcellus is profitable at $4 mmBtu.
Looking at the chart again, we can see that the price of natural gas never got close to $6 mmtu.. the highest was $4.37 mmBtu. Thus, the U.S. Shale Gas Industry has been a commercial failure.
Now that the major shale gas producers are saddled with debt and many of the sweet spots in these shale gas fields have already been drilled, I believe U.S. shale gas production will collapse going forward. If we look at the Haynesville Shale Gas Field production profile, a 50% decline in 4 years represents a collapse in my book.
The Two Nails In The U.S. Empire Coffin
As I stated in several articles and interviews, ENERGY DRIVES THE ECONOMY, not finance. So, energy is the key to economic activity. Which means, energy output and the control of energy are the keys to economic prosperity.
While the collapse of U.S. shale gas production is one nail in the U.S. Empire Coffin, the other is Shale Oil. U.S. shale oil production peaked before shale gas production:
This chart is a few months out of date, but according to the EIA’s Productivity Reports, domestic oil production from the top four shale oil fields peaked in April of 2015… three months before the major shale gas fields (July 2015).
Unfortunately for the United States, it was never going to become energy independent. The notion of U.S. energy independence was built on hype, hope and cow excrement. Instead, we are now going to witness the collapse of U.S. shale oil and gas production.
The collapse of U.S. shale oil and gas production are two nails in the U.S. Empire coffin. Why? Because U.S. will have to rely on growing oil and gas imports in the future as the strength and faith of the Dollar weakens. I see a time when oil exporting countries will no longer take Dollars or U.S. Treasuries for oil. Which means… we are going to have to actually trade something of real value other than paper promises.
I believe U.S. oil production will decline 30-40% from its peak (9.6 million barrels per day July 2015) by 2020 and 60-75% by 2025. The U.S. Empire is a suburban sprawl economy that needs a lot of oil to keep trains, trucks and cars moving. A collapse in oil production will also mean a collapse of economic activity.
Thus, a collapse of economic activity means skyrocketing debt defaults, massive bankruptcies and plunging tax revenue. This will be a disaster for the U.S. Empire.
http://www.zerohedge.com/news/2016-01-30/another-nail-us-empire-coffin-collapse-shale-gas-production-has-begun
Negative Interest Rates Already In Fed’s Official Scenario
Feb. 2, 2016
Over the past year, and certainly in the aftermath of the BOJ's both perplexing and stunning announcement (as it revealed the central banks' level of sheer desperation), we have warned (most recently "Negative Rates In The U.S. Are Next: Here's Why In One Chart") that next in line for negative rates is the Fed itself, whether Janet Yellen wants it or not. Today, courtesy of Wolf Richter, we find that this is precisely what is already in the small print of the Fed's future stress test scenarios, and specifically the "severely adverse scenario" where we read that:
The severely adverse scenario is characterized by a severe global recession, accompanied by a period of heightened corporate financial stress and negative yields for short-term U.S. Treasury securities.
As a result of the severe decline in real activity and subdued inflation, short-term Treasury rates fall to negative ½ percent by mid-2016 and remain at that level through the end of the scenario.
And so the strawman has been laid. The only missing is the admission of the several global recession, although with global GDP plunging over 5% in USD terms, we wonder just what else those who make the official determination are waiting for.
Finally, we disagree with the Fed that QE4 is not on the table: it most certainly will be once stock markets plunge by 50% as the "severely adverse scenario" envisions, and once NIRP fails to boost economic activity, as it has failed previously everywhere else it has been tried, the Fed will promtply proceed with what has worked before, if only to make the true situation that much worse.
Until then, we sit back and wait.
Here is Wolf Richter with Negative Interest Rates Already in Fed’s Official Scenario
The Germans, with Teutonic precision, call them “Punishment Interest.” Negative interest rates are spreading from the ECB’s negative deposit rate across the bond market and to some savings accounts in the Eurozone. The idea is to enrich existing bond holders and flog savers until their mood improves. Stock prices are allowed to get crushed by reality.
Negative interest rates destroy one of the most essential mechanisms in an economy: the pricing of risk. Investors end up taking huge risks with no reward. Many of them will get cleaned out down the road.
In Switzerland, punishment interest already causes “perverse unpredictable effects,” as mortgage rates have started to soar. It’s wreaking havoc in Denmark and Sweden. Bank of Canada Governor Stephen Poloz let the idea float that he’d unleash punishment interest to destroy the Canadian dollar. The Bank of Japan announced Friday morning – timed for maximum market effect – that it too would inflict negative interest rates on its subjects.
In the US, Ben Bernanke has been out there preaching to the choir about them. Over-indebted corporate America, except for the banks, would love this absurdity; it would allow them to actually make money off their mountain of debt.
“Potentially anything – including negative interest rates – would be on the table,” Fed Chair Janet Yellen told a House of Representatives committee in early November.
Fed Vice Chair Stanley Fischer has been publicly obsessing about them for a while. Monday, during the Q&A after his speech at the Council on Foreign Relations, he said that negative interest rates are “working more than I can say I expected in 2012.”
It seems to be just talk. But negative interest rates are already baked into the official scenario for 2016. It’s in the Board of Governors’ new report on the three scenarios to be used in 2016 for the annual stress test that large banks are required to undergo under the Dodd-Frank Act and the Capital Plan Rule.
The scenarios – baseline, adverse, and severely adverse – start in the first quarter 2016 and also include economic factors in the Eurozone, the UK, Japan, and the weighted aggregate of China, India, South Korea, Hong Kong, and Taiwan.
In the “severely adverse scenario,” things get interesting.
But don’t worry, the Fed emphasizes that “this is a hypothetical scenario” for the purpose of a bank stress test and “does not represent a forecast of the Federal Reserve”:
The severely adverse scenario is characterized by a severe global recession, accompanied by a period of heightened corporate financial stress and negative yields for short-term U.S. Treasury securities.
GDP begins to tank in Q1 2016 and by Q1 2017 is 6.25% below pre-recession peak. The unemployment rate hits 10% by mid-2017. Headline CPI rises from an annual rate of 0.25% in Q1 2016 to 1.25% by the end of the recession. Asset prices “drop sharply,” with stocks down “approximately 50%” through the end of this year, accompanied by a surge in volatility, “which approaches the levels attained in 2008.” Through Q2 2018, home prices plunge 25%, commercial real estate prices 30%.
“Corporate financial conditions are stressed severely, reflecting mounting credit losses, heightened investor risk aversion, and strained market liquidity conditions.” Bond spreads blow out, with the yield spread between investment-grade corporates and Treasuries jumping to 5.75% by the end of 2016.
So things are going to get ugly. And here is what the Fed is going to do next:
As a result of the severe decline in real activity and subdued inflation, short-term Treasury rates fall to negative ½ percent by mid-2016 and remain at that level through the end of the scenario.
Short-term Treasury rates can only fall to a negative 0.5% if the fed funds rate is at that level.
And the whole yield curve comes down, with the 10-year Treasury yield collapsing to 0.25% by the end of this quarter, but then “rising gradually” all the way to a whopping 0.75% by the end of the recession and to 1.75% by Q1 2019 (it’s 1.93% now).
The international component “features severe recessions” in the Eurozone, the UK, and Japan, and a mild recession in developing Asia, along with a “pronounced decline in consumer prices.”
Due to “flight-to-safety capital flows,” the dollar appreciates against the euro, the pound, and the currencies of developing Asia, but will “depreciate modestly” against the yen, “also in line with flight-to-safety capital flows.”
One of the differences between the severely adverse scenarios for 2015 and 2016? The scenario this year “features a path of negative short-term U.S. Treasury rates.”
Who are the winners? Existing holders of long-term Treasuries who will benefit from “larger gains on the existing portfolio of these securities.”
However, the Fed makes no promises about stocks, having seen the debacle playing out in Europe where stocks have plunged despite negative interest rates. And banks will get hit as “negative short-term rates may be expected to reduce banks’ net interest margins and ultimately, to lower PPNR [pre-provision net revenue].
And there you have it. The Fed already has a “path” to negative interest rates.
But note: not a single word about QE.
If the stock market crashes 50% this year, as the “severely adverse” scenario spells out, all the Fed will do is slash the fed funds rate to a negative 0.5%. And if stocks crash only 25% this year, instead of 50%?
That’s the case in the Fed’s middle scenario, the merely “adverse” scenario. Short-term rates will “remain near zero” it says – maybe slightly below where they’re right now. So no negative interest rates. And no QE either. Stocks can go to heck, the Fed is saying. It’s worried about credits, particularly high-grade credits. Junk bonds and stocks are on their own.
And this concept of switching to negative interest rates and away from QE is even in line with the Bank of Japan’s desperate head fake. Read… QE in Japan Nears End: Daiwa Capital Markets
Over the past year, and certainly in the aftermath of the BOJ's both perplexing and stunning announcement (as it revealed the central banks' level of sheer desperation), we have warned (most recently "Negative Rates In The U.S. Are Next: Here's Why In One Chart") that next in line for negative rates is the Fed itself, whether Janet Yellen wants it or not. Today, courtesy of Wolf Richter, we find that this is precisely what is already in the small print of the Fed's future stress test scenarios, and specifically the "severely adverse scenario" where we read that:
The severely adverse scenario is characterized by a severe global recession, accompanied by a period of heightened corporate financial stress and negative yields for short-term U.S. Treasury securities.
As a result of the severe decline in real activity and subdued inflation, short-term Treasury rates fall to negative ½ percent by mid-2016 and remain at that level through the end of the scenario.
And so the strawman has been laid. The only missing is the admission of the several global recession, although with global GDP plunging over 5% in USD terms, we wonder just what else those who make the official determination are waiting for.
Finally, we disagree with the Fed that QE4 is not on the table: it most certainly will be once stock markets plunge by 50% as the "severely adverse scenario" envisions, and once NIRP fails to boost economic activity, as it has failed previously everywhere else it has been tried, the Fed will promtply proceed with what has worked before, if only to make the true situation that much worse.
Until then, we sit back and wait.
Here is Wolf Richter with Negative Interest Rates Already in Fed’s Official Scenario
The Germans, with Teutonic precision, call them “Punishment Interest.” Negative interest rates are spreading from the ECB’s negative deposit rate across the bond market and to some savings accounts in the Eurozone. The idea is to enrich existing bond holders and flog savers until their mood improves. Stock prices are allowed to get crushed by reality.
Negative interest rates destroy one of the most essential mechanisms in an economy: the pricing of risk. Investors end up taking huge risks with no reward. Many of them will get cleaned out down the road.
In Switzerland, punishment interest already causes “perverse unpredictable effects,” as mortgage rates have started to soar. It’s wreaking havoc in Denmark and Sweden. Bank of Canada Governor Stephen Poloz let the idea float that he’d unleash punishment interest to destroy the Canadian dollar. The Bank of Japan announced Friday morning – timed for maximum market effect – that it too would inflict negative interest rates on its subjects.
In the US, Ben Bernanke has been out there preaching to the choir about them. Over-indebted corporate America, except for the banks, would love this absurdity; it would allow them to actually make money off their mountain of debt.
“Potentially anything – including negative interest rates – would be on the table,” Fed Chair Janet Yellen told a House of Representatives committee in early November.
Fed Vice Chair Stanley Fischer has been publicly obsessing about them for a while. Monday, during the Q&A after his speech at the Council on Foreign Relations, he said that negative interest rates are “working more than I can say I expected in 2012.”
It seems to be just talk. But negative interest rates are already baked into the official scenario for 2016. It’s in the Board of Governors’ new report on the three scenarios to be used in 2016 for the annual stress test that large banks are required to undergo under the Dodd-Frank Act and the Capital Plan Rule.
The scenarios – baseline, adverse, and severely adverse – start in the first quarter 2016 and also include economic factors in the Eurozone, the UK, Japan, and the weighted aggregate of China, India, South Korea, Hong Kong, and Taiwan.
In the “severely adverse scenario,” things get interesting.
But don’t worry, the Fed emphasizes that “this is a hypothetical scenario” for the purpose of a bank stress test and “does not represent a forecast of the Federal Reserve”:
The severely adverse scenario is characterized by a severe global recession, accompanied by a period of heightened corporate financial stress and negative yields for short-term U.S. Treasury securities.
GDP begins to tank in Q1 2016 and by Q1 2017 is 6.25% below pre-recession peak. The unemployment rate hits 10% by mid-2017. Headline CPI rises from an annual rate of 0.25% in Q1 2016 to 1.25% by the end of the recession. Asset prices “drop sharply,” with stocks down “approximately 50%” through the end of this year, accompanied by a surge in volatility, “which approaches the levels attained in 2008.” Through Q2 2018, home prices plunge 25%, commercial real estate prices 30%.
“Corporate financial conditions are stressed severely, reflecting mounting credit losses, heightened investor risk aversion, and strained market liquidity conditions.” Bond spreads blow out, with the yield spread between investment-grade corporates and Treasuries jumping to 5.75% by the end of 2016.
So things are going to get ugly. And here is what the Fed is going to do next:
As a result of the severe decline in real activity and subdued inflation, short-term Treasury rates fall to negative ½ percent by mid-2016 and remain at that level through the end of the scenario.
Short-term Treasury rates can only fall to a negative 0.5% if the fed funds rate is at that level.
And the whole yield curve comes down, with the 10-year Treasury yield collapsing to 0.25% by the end of this quarter, but then “rising gradually” all the way to a whopping 0.75% by the end of the recession and to 1.75% by Q1 2019 (it’s 1.93% now).
The international component “features severe recessions” in the Eurozone, the UK, and Japan, and a mild recession in developing Asia, along with a “pronounced decline in consumer prices.”
Due to “flight-to-safety capital flows,” the dollar appreciates against the euro, the pound, and the currencies of developing Asia, but will “depreciate modestly” against the yen, “also in line with flight-to-safety capital flows.”
One of the differences between the severely adverse scenarios for 2015 and 2016? The scenario this year “features a path of negative short-term U.S. Treasury rates.”
Who are the winners? Existing holders of long-term Treasuries who will benefit from “larger gains on the existing portfolio of these securities.”
However, the Fed makes no promises about stocks, having seen the debacle playing out in Europe where stocks have plunged despite negative interest rates. And banks will get hit as “negative short-term rates may be expected to reduce banks’ net interest margins and ultimately, to lower PPNR [pre-provision net revenue].
And there you have it. The Fed already has a “path” to negative interest rates.
But note: not a single word about QE.
If the stock market crashes 50% this year, as the “severely adverse” scenario spells out, all the Fed will do is slash the fed funds rate to a negative 0.5%. And if stocks crash only 25% this year, instead of 50%?
That’s the case in the Fed’s middle scenario, the merely “adverse” scenario. Short-term rates will “remain near zero” it says – maybe slightly below where they’re right now. So no negative interest rates. And no QE either. Stocks can go to heck, the Fed is saying. It’s worried about credits, particularly high-grade credits. Junk bonds and stocks are on their own.
And this concept of switching to negative interest rates and away from QE is even in line with the Bank of Japan’s desperate head fake. Read… QE in Japan Nears End: Daiwa Capital Markets
The Numbers Are In: Hedge Funds Furiously Dumped The Rally; Selling Was "Biggest In Nearly Two Years"
zerohedge.com
02/02/2016
As we wrote yesterday when reviewing the latest note from JPM's Mislav Matejka, according to the JPM strategist not only had the window to buy stocks into the torrid S&P500 rebound closed, but traders should "start fading it within days" as JPM stuck "to the overriding view that one should use any strength as an opportunity to reduce equity allocation."
Today, when reading the latest report by BofA's equity and quant strategy team looking at what the "smart money" - institutions, hedge funds and private clients - are doing, we find that JPM's advice was heeded, and the rally was indeed sold with reckless abandon.
From BofA:
Last week, during which the S&P 500 rallied another 1.8%, BofAML clients were net sellers of US stocks for the first time in five weeks, in the amount of $1.2bn. Net sales were led by hedge fund clients, who had previously been net buyers for the prior five weeks, while private clients and institutional clients were also net sellers. (Institutional clients have alternated between buying and selling in recent weeks, while private clients have been sellers for the last three weeks.)
Perhaps just as notable is that according to BofA, buybacks by corporate clients decelerated last week to their lowest level year-to-date, but on a four-week average basis buybacks are well above last January’s levels.
In other words, just as we suggested yesterday, much of the February buybacks expected by Goldman's David Kostin to come to the rescue of the market, have been pulled forward into January, leaving far less dry powder available for the month of February.
What was the smart money selling?
Net sales last week were chiefly in large caps, while small caps also saw outflows; clients continued to buy mid-cap. Previously, all three size segments had seen net buying every week of 2016.
Among the details, one sector stands out: recent hedge fund darling, the healthcare sector, is seeing a furious exit by existing holders with sales "the biggest in seven months and the third-largest in our data history" as what worked until now no longer works. Tech was also slammed and sakes were "the largest in fifteen months and the fourth-largest in our data history."
Net sales last week were led by Tech and Health Care stocks, despite overall 4Q earnings for these sectors coming in better than expected. Health Care—which has been one of the most crowded sectors within the S&P 500—was the worst-performing sector last week, and we’ve noted that revision and surprise trends have been rolling over for this sector. This is the only sector with a multi-week net selling trend, and outflows from Health Care stocks last week were the biggest in seven months and the third-largest in our data history (since ’08), led by hedge funds. Sales of Tech were the largest in fifteen months and the fourth-largest in our data history, led by institutional clients. Energy stocks saw the biggest net buying by our clients last week amid the rally in oil prices; with inflows from all three client groups. This sector has now seen four consecutive weeks of buying by our clients, suggesting increasing conviction that oil has bottomed. Financials stocks also saw net buying for the fifth consecutive week amid the sell-off in this sector, while clients also continued to buy Telecom stocks for the fifth week.
But nobody sold more than the very pinnacle of smart money: hedge fund investors, where "net sales last week by hedge funds were the biggest in nearly two years and the fourth-largest in our data history. This follows near-record levels of net buying by this group in early January."
One final observation:
"overall for the month of January, clients were net buyers of single stocks, while ETFs saw more muted net buying. This would be the first year in our data history (since ’08) that clients bought single stocks."
A return to normalcy perhaps?
Finally, while weekly flows tend to be notoriously volatile, the long-term trend across all three investor classes are clear.
http://www.zerohedge.com/news/2016-02-02/numbers-are-hedge-funds-furiously-dumped-rally-selling-was-biggest-nearly-two-years
A Chinese Banker Explains Why There Is No Way Out
zerohedge.com
01/30/2016
Over the past year, we have frequently warned that the biggest financial risk (if not social, which in the form of soaring worker unrest is a far greater threat to Chinese civilization) threatening China, is its runaway non-performing loans, which at anywhere between 10 and 20% of total bank assets, mean that China is one chaotic default away from collapsing into the post "Minsky Moment" singlarity where it can no longer rollover its bad debt, leading to a debt supernova and full financial collapse.
And as China's total leverage keeps rising, and according to at least one estimate is now a gargantuan 350% of GDP (incidentally the same as the US), the threat of a rollover "glitch" gets exponentially greater.
To be sure, in recent months the topic of China's bad debt has gained increasingly more prominence among the mainstream, and notably none other than Kyle Bass has made the bursting of China's credit cycle the basis for his short Yuan trade as noted here previously:
What I think the narrative will swing to by the end of this year if not sooner, is the real issue in China is not simply that profits have peaked. The real issue is the size of their banking system. Do you remember the reason the European countries ended up falling like dominoes during the European crisis was their banking systems became many multiples of their GDP and therefore many, many multiples of their central government revenue. In China, in dollar terms their banking system is almost $35 trillion against a GDP of $10 and their banking system has grown 400% in 8 years with non-performing loans being nonexistent. So what we are going to see next is a credit cycle, and in a credit cycle you see some losses, but if China's banking system loses 10%, you are going to see them lose $3.5 trillion.
And judging by the surge in recent and increasingly louder calls for a Chinese devaluation, some advocating a major one-off currency debasement, Bass' perspective is certainly prevalent among the trading community. Bank of America goes so far as to speculate that the "upcoming G20 meeting in Shanghai offers an opportunity for policy makers to seize the “expectations” initiative via a one-off China devaluation." It does, however, also add that the "risk is markets need to panic first" before instead of piecemeal devaluation, China follows through with a Plaza Accord-type currency intervention.
Friday's adoption of NIRP by Japan, which send the US Dollar soaring, has only made any upcoming future Chinese devaluation even more likely.
But whether China devalued or not, one thing is certain: it is next to impossible for China - under the current socio economic and financial regime - to stop the relentless growth in NPLs, which even by conservative estimates at in the trillion(s), accounting for at least 10% of China's GDP.
Sure enough, a cursory skimming of news from China reveals that even Chinese bankers now "admit the NPL situation is dire, but will keep on lending" anyway.
As the Chiecon blog notes, NPL "ratios might be closer to 10%... supported by revelations in this article, where Chinese bankers complain of missing performance targets, spiraling bad loans, and end of year pay cuts."
“Right now, we’ve nowhere to issue new loans” said Mr. Zhang, a general manager in charge of new loans at one of the listed commercial bank branches. Zhang believes NPL ratios have yet to peak, with SME loans the worst hit area. Ironically this has forced Zhang to direct lending back to the LGFVs, property developers and conglomerates, industries which the Chinese government had previously instructed banks to restrict lending to, based on oversupply and credit risk fears.
But the main reason why China is now trapped, and on one hand is desperate to stabilize its economy and stop growing its levereage at nosebleed levels, while on the other hand it is under pressure to issue more loans while at the same time it is unwilling to write off bad loans, can be found in the following very simple explanation offered by Mr. Zhou, a junior banker at a Chinese commercial bank.
"If I don’t issue more loans, then my salary isn’t enough to repay the mortgage, and car loan. It’s not difficult to issue more loans, but lets say in a years time when the loan is due, if the borrower defaults, then I wont just see a pay cut, I’ll be fired, and still be responsible for loan recovery."
And that, in under 60 words, explains why China finds itself in a no way out situation, and why despite all its recurring posturing, all its promises for reform, all its bluster for deleveraging, China's ruling elite will never be able to achieve an internal devaluation, and why despite its recurring threats to crush, gut and destroy all the evil Yuan shorts, ultimately it will have no choice but to pursue an external devaluation of its economy by way of devaluing its currency presumably some time before its foreign reserves run out (which at a $185 billion a month burn rate may not last for even one year).
However, before it does, it will make sure that it also crushes every Yuan short, doing precisely what the Fed has done with equity shorts in the US over the past 7 years.
http://www.zerohedge.com/news/2016-01-30/chinese-banker-explains-why-there-no-way-out
"Pandora's Box Is Open": Why Japan May Have Started A 'Silent Bank Run'
zerohedge.com
01/30/2016
As extensively discussed yesterday in the aftermath of the BOJ's stunning decision to cut rates to negative for the first time in history (a decision which it appears was taken due to Davos peer pressure, a desire to prop up stock markets and to punish Yen longs, and an inability to further boost QE), there will be consequences - some good, mostly bad.
As Goldman's Naohiko Baba previously explained, NIRP in Japan will not actually boost the economy: "we do have concerns about the policy transmission channel. Policy Board Member Koji Ishida, who voted against the new measures, said that “a further decline in JGB yields would not have significantly positive effects on economy activity.” We concur with this sentiment, particularly for capex. The key determinants of capex in Japan are the expected growth rate and uncertainty about the future as seen by corporate management according to our analysis, while the impact of real long-term rates has weakened markedly in recent years."
What the BOJ's NIRP will do, is result in a one-time spike in risk assets, something global stock and bond markets have already experienced, and a brief decline in the Yen, one which traders can't wait to fade as Citi FX's Brent Donnelly explained yesterday.
NIRP will also have at most two other "positive" consequences, which according to Deutsche Bank include 1) reinforcing financial institutions’ decisions to grant new loans and invest in securities (if only in theory bnecause as explained further below in practice this may very well backfire); and 2) widening interest rate differentials to weaken JPY exchange rates, which in turn support companies’ JPY-based sales and profit, for whom a half of consolidated sales are from overseas.
That covers the positive. The NIRP negatives are far more troubling. The first one we already noted yesterday, when Goldman speculated that launching NIRP could mean that further QE is all tapped out:
... we believe the BOJ thinks that JGB purchases will have reached their technical limit in quantitative terms eventually, and it is highly likely it was a last-ditch measure to somehow maintain the current pace of purchases for some time. If not, we would have expected the BOJ not to introduce a negative interest rate this time either and to have opted instead to further increase JGB purchases.
Today, Deutsche Bank's Japan analyst Mikihiro Matsuoka jumps on the bandwagon and adds that "we are worried about a possible opening of a Pandora’s Box by explicitly removing the lower bound of nominal interest rates."
Here, according to Deutsche, are the most severe consequences of Japan opening the NIRP Pandora's box :
1.as the monetary base target of expanding by JPY80trn a year continues, the tax on financial institutions expands rapidly also, even if an upper bound on excess reserves that are subject to the negative rate is set. The net interest margin of Japanese commercial banks is lower than in other countries.
2.it is unlikely to deliver a combination of the reduction in excess reserves and a rise in lending on private financial institutions’ balance sheets: financial institutions cannot avoid this tax. If they intend to shift reserves to loans and holding securities in order to avoid the tax from the negative interest rate, excess reserves (a part of the monetary base) should fall, which the BoJ would not accept. As long as the target for monetary base expansion is maintained, the mostly likely outcome would be increases in both excess reserves and bank loans (or the holding of securities). On the other hand, in order for the monetary base to continue to expand, there have to exist sellers of government securities to the BoJ. A downward shift of the yield curve could cause financial institutions to refrain from selling government securities with higher associated capital gains to the BoJ.
3.the negative interest rate is, in effect, a tax on financial assets, and not the BoJ’s intention. This could lead to an opposite outcome to that of the initial intention, whereby the country encourages companies and households to engage in capital outflow.
It is that last bullet point which is most important because it leads us to the most disturbing topic of all for Japan - the risk that NIRP backfires and leads to another "China", where the local citizens rush to park their assets offshore, resulting in a slow at first then rapidly accelerating capital outflow.
This is how DB explains it:
if the negative interest rate continues for longer or goes deeper, commercial banks may have to set negative interest rates on deposits, which would expand not only the tax on commercial banks, but also on depositors (households and companies). This could lead to a ‘silent bank run’ via a shift of deposits to cash (banknotes), which in turn damages the sound banking system by enlarging the leakage of funds from the credit creation mechanism in the banking system.
That, and the capital outflow noted above. The good news is that Japan has a lot of physical banknotes to allow the NIRP bank run to continue for quite a while before collapsing the financial system.
In short, to grasp the worst possible consequence of Japan's panicked response to a rising Yen and plunging Nikkei look no further than China's unprecedented capital control attempts to stem the monetary outflow. Could it be that in its eagerness to devalue the Yen, the BOJ - like the PBOC - will be fighting tooth and nail in a few months to prop it up?
And if that wasn't cheerful enough, here is DB's conclusion which confirms that just a month after the Fed made a policy mistake, it is Japan's turn to follow in Yellen's shoes:
We wonder whether removing the last breakwater of the lower bound at a zero interest rate could end up being an expensive choice in the long run. The factor which pushed the BoJ down this path is probably its view that causality runs from economic activity to wages and then to prices, which we do not agree with. Our view is that causality runs from economic activity to prices and then to wages, and we do not share the argument that inflation does not rise because wages have not risen.
We believe the additional room that the BoJ has to lower rates on bank reserves is smaller than in other countries that have already introduced a negative interest rate, because of the lower net interest margin of commercial banks in Japan. However, if the BoJ pursues this path, we could reach the point of the trade-off of possibly damaging the soundness of the banking system.
By then, however, a Davos peer-pressured Kuroda will be long gone, and the doomed attempt to keep the system together will be someone else's problem. For now, all that matters is that stocks bounced... if only for a ahort time.
http://www.zerohedge.com/news/2016-01-30/pandoras-box-open-db-warns-japan-may-have-started-silent-bank-run
Pay attention to long-term debt cycle
Ray Dalio
Jan. 25, 2016
I have a controversial view that is based on my alternative economic template, and I feel a responsibility to share at this precarious time.
In brief, the Federal Reserve’s template, and that of most economists and market participants, reflects the business cycle.
Based on it, tightening should occur when a) the rate of growth in demand is greater than the rate of growth in capacity and b) the usage of capacity (as measured by indicators such as the GDP gap and the unemployment rate) is becoming high.
As a result, tightening now makes sense.
However, as I see it, there are two important cycles to pay attention to — the business cycle, or short-term debt cycle, and the debt supercycle, or long-term debt cycle.
We are seven years into the expansion phase of the business/short-term debt cycle — which typically lasts about eight to 10 years — and near the end of the expansion phase of a long-term debt cycle, which typically lasts about 50 to 75 years.
It is because of the long-term debt cycle dynamics that we are seeing global weakness and deflationary pressures that warrant global easing rather than tightening.
Since the dollar is the world’s most important currency, the Fed is the most important central bank for the world as well as the central bank for Americans, and as the risks are asymmetric on the downside, it is best for the world and for the US for the Fed not to tighten.
Since the long-term debt cycle issue is the biggest issue that separates my view from others, I’d like to briefly focus on its mechanics.
What I am contending is that there are limits to spending growth financed by a combination of debt and money. When these limits are reached, it marks the end of the upward phase of the long-term debt cycle. In 1935, this scenario was dubbed “pushing on a string”.
This scenario reflects the reduced ability of the world’s reserve currency central banks to be effective at easing when both interest can’t be lowered and risk premia are too low to have quantitative easing be effective.
Since we commonly understand why lowering interest rates stimulates debt and economic growth, and less commonly understand how QE works, I’d like to explain it.
Our whole capital allocation system — banking and investing — is driven by spreads so that when they are large, QE works better than when they are small
QE works because those “risk premia” — which are the spreads between the expected return on cash and the expected returns on other assets such as bonds, stocks, real estate and private equity — draw the buying of investors who sell their bonds to the central banks during QE.
You see, our whole capital allocation system — banking and investing — is driven by spreads so that when they are large, QE works better than when they are small.
When there are good spreads — in other words a large risk premia — and those who sold their bonds take their newly acquired cash to buy those assets that offer attractive spreads, bid up their prices and drive down those expected return spreads (ie risk premia) of those assets.
That is where things now stand across the world’s reserve currencies, where the expected returns of bonds (and most asset classes) are relatively low in relation to the expected returns of cash.
As a result, it is difficult to push the prices of these assets up and it is easy to have them fall. And when they fall, there is a negative impact on economic growth.
When this configuration exists — and it is also the case that debt and debt service costs are high in relation to income, so that debt levels cannot be increased without reducing spending — stimulating demand is more difficult, and restraining demand is easier, than is normally the case.
At such times the risks are asymmetric on the downside and it behoves central banks to err on the side of waiting until they see the whites of the eyes of inflation before tightening.
That, in my opinion, is now the case.
http://www.ft.com/cms/s/2/b41813dc-c028-11e5-846f-79b0e3d20eaf.html#axzz3yYKIvQTa
One Chart Tells The Story: Corporate Debt/Equity Ratio At All-Time High
by David Stockman
January 27, 2016
http://davidstockmanscontracorner.com/chart-of-the-day-corporate-debtequity-ratio-at-all-time-high/
Red Ponzi Ticking
by David Stockman
January 27, 2016
There is something rotten in the state of Denmark. And we are not talking just about the hapless socialist utopia on the Jutland Peninsula——even if it does strip assets from homeless refugees, charge savers 75 basis points for the deposit privilege and allocate nearly 60% of its GDP to the Welfare State and its untoward ministrations.
In fact, the rot is planetary. There is unaccountable, implausible, whacko-world stuff going on everywhere, but the frightful part is that most of it goes unremarked or is viewed as par for the course by the mainstream narrative.
The topic at hand is the looming implosion of China’s Red Ponzi; and, more specifically, the preposterous Wall Street/Washington presumption that it’s just another really big economy that overdid the “growth” thing and is now looking to Beijing’s firm hand to effect a smooth transition. That is, an orderly migration from a manufacturing, export and fixed investment boom-land to a pleasant new regime of shopping, motoring, and mass consumption.
Would that it could. But China is not a $10 trillion growth miracle with transition challenges; it is a quasi-totalitarian nation gone mad digging, building, borrowing, spending and speculating in a magnitude that has no historical parallel.
So doing, It has fashioned itself into an incendiary volcano of unpayable debt and wasteful, crazy-ass overinvestment in everything. It cannot be slowed, stabilized or transitioned by edicts and new plans from the comrades in Beijing. It is the greatest economic trainwreck in human history barreling toward a bridgeless chasm.
And that proposition makes all the difference in the world. If China goes down hard the global economy cannot avoid a thundering financial and macroeconomic dislocation. And not just because China accounts for 17% of the world’s $80 trillion of GDP or that it has been the planet’s growth engine most of this century.
In fact, China is the rotten epicenter of the world’s two decade long plunge into an immense central bank fostered monetary fraud and credit explosion that has deformed and destabilized the very warp and woof of the global economy.
But in China the financial madness has gone to a unfathomable extreme because in the early 1990s a desperate oligarchy of despots who ruled with machine guns discovered a better means to stay in power. That is, the printing press in the basement of the PBOC—-and just in the nick of time (for them).
Print they did. Buying in dollars, euros and other currencies hand-over-fist in order to peg their own money and lubricate Mr. Deng’s export factories, the PBOC expanded its balance sheet from $40 billion to $4 trillion during the course of a mere two decades. There is nothing like that in the history of central banking—–nor even in economists’ most febrile imagings about its possibilities.
China Foreign Exchange Reserves
The PBOC’s red hot printing press, in turn, emitted high-powered credit fuel. In the mid-1990s China had about $500 billion of public and private credit outstanding—hardly 1.0X its rickety GDP. Today that number is $30 trillion or even more.
Yet nothing in this economic world, or the next, can grow at 60X in only 20 years and live to tell about it. Most especially, not in a system built on a tissue of top-down edicts, illusions, lies and impossibilities, and which sports not even a semblance of financial discipline, political accountability or free public speech.
To wit, China is a witches brew of Keynes and Lenin. It’s the financial tempest which will slam the world’s great bloated edifice of central bank fostered faux prosperity.
So the right approach to the horrible danger at hand is not to dissect the pronouncements of Beijing in the manner of the old kremlinologists. The occupants of the latter were destined to fail in the long run, but they at least knew what they were doing tactically in the here and now; it was worth the time to parse their word clouds and seating arrangements at state parades.
By contrast, and not to mix a metaphor, the Red Suzerains of Beijing have built a Potemkin Village. But they actually believe its real because they do not have even a passing acquaintanceship with the requisites and routines of a real capitalist economy.
Ever since the aging oligarch(s) who run China were delivered from Mao’s hideous dystopia by Mr. Deng’s chance discovery of printing press prosperity, they have lived in an ever expanding bubble that is so economically unreal that it would make the Truman Show envious. Any rulers with even a modicum of economic literacy would have recognized long ago that the Chinese economy is booby-trapped everywhere with waste, excess and unsustainability.
Here is but one example. Somewhere near Shanghai some credit-crazed developers built a replica of the Pentagon on 100 acres of land. This was not intended as a build-to-lease deal with the PLA (People’s Liberation Army); its a shopping mall that apparently has no tenants and no customers!
One of the more accurate things I have ever said is that the USA’s Pentagon was built on a swampland of waste. That is, I do take my anti-statist viewpoint seriously and therefore firmly believe that the Warfare State is every bit as prone to mission creep and the prodigious waste of societal resources as is the Welfare State and the bailout breeding backrooms of Washington.
But our Pentagon at least has a public purpose and would return some benefit to society were its mission to be shrunk to honestly defending the homeland. By contrast, China’s “Pentagon” gives waste an altogether new definition.
Projects like the above—–and China is crawling with them—–are a screaming marker of an economic doomsday machine. They bespoke an inherently unsustainable and unstable simulacrum of capitalism where the purpose of credit is to fund state mandated GDP quota’s, not finance efficient investments with calculable risks and returns.
Accordingly, the outward forms of capitalism are belied by the substance of statist control and central planning. For example, there is no legitimate banking system in China—just giant state bureaus which are effectively run by party operatives.
Their modus operandi amounts to parceling out quotas for national GDP and credit growth from the top, and then water-falling them down a vast chain of command to the counties, townships and villages below. There have never been any legitimate financial prices in China—all interest rates and FX rates have been pegged and regulated to the decimal point; nor has there ever been any honest financial accounting either—-loans have been perpetual options to extend and pretend.
And, needless to say, there is no system of financial discipline based on contract law. China’s GDP has grown by $10 trillion dollars during this century alone——-that is, there has been a boom across the land that makes the California gold rush appear pastoral by comparison.
Yet in all that frenzied prospecting there have been almost no mistakes, busted camps, empty pans or even personal bankruptcies. When something has occasionally gone wrong with an “investment” the prospectors have gathered in noisy crowds on the streets and pounded their pans for relief—-a courtesy that the regime has invariably granted.
Indeed, the Red Ponzi makes Wall Street look like an ethical improvement society. Developers there built an entire $50 billion replica of Manhattan Island near the port city of Tianjin—– complete with its own Rockefeller Center and Twin Towers—– but have neglected to tell investors that no one lives there. Not even bankers!
Stated differently, even at the peak of recent financial bubbles in London, NYC, Miami or Houston they did not build such monuments to sheer economic waste and capital destruction. But just consider the case of China’s mammoth steel industry.
It grew from about 70 million tons of production in the early 1990s to 825 million tons in 2014. Beyond that, it is the capacity build-out behind the chart below which tells the full story.
To wit, Beijing’s tsunami of cheap credit enabled China’s state-owned steel companies to build new capacity at an even more fevered pace than the breakneck growth of annual production. Consequently, annual crude steel capacity now stands at nearly 1.2 billion tons, and nearly all of that capacity—-about 65% of the world total—— was built in the last ten years.
Needless to say, it’s a sheer impossibility to expand efficiently the heaviest of heavy industries by 17X in a quarter century.
This means that China’s aberrationally massive steel industry expansion created a significant increment of demand for its own products. That is, plate, structural and other steel shapes that go into blast furnaces, BOF works, rolling mills, fabrication plants, iron ore loading and storage facilities, as well as into plate and other steel products for shipyards where new bulk carriers were built and into the massive equipment and infrastructure used at the iron ore mines and ports.
That is to say, the Chinese steel industry has been chasing its own tail, but the merry-go-round has now stopped. For the first time in three decades, steel production in 2015 was down 2-3% from 2014’s peak of 825 million tons and is projected to drop to 750 million tons next year, even by the lights of the China miracle believers.
The fact is, China will be lucky to have 500 million tons of true sell-through demand—-that is, on-going domestic demand for sheet steel to go into cars and appliances and for rebar and structural steel to be used in replacement construction once the current one-time building binge finally expires. That’s just 40% of its massive capacity investment.
And it is also evident that it will not be in a position to dump its massive surplus on the rest of the world. Already trade barriers against last year’s 110 million tons of exports are being thrown up in Europe, North America, Japan and nearly everywhere else.
This not only means that China has upwards of a half-billion tons of excess capacity that will crush prices and profits, but, more importantly, that the one-time steel demand for steel industry CapEx is over and done. And that means shipyards and mining equipment, too.
That is already evident in the vanishing order book for China’s giant shipbuilding industry. The latter is focussed almost exclusively on dry bulk carriers——-the very capital item that delivered into China’s vast industrial maw the massive tonnages of iron ore, coking coal and other raw materials. But within in a year or two most of China’s shipyards will be closed as its backlog rapidly vanishes under a crushing surplus of dry bulk capacity that has no precedent, and which has driven the Baltic shipping rate index to historic lows.
Total orders at Chinese shipyards tumbled 59 percent during 2015, according to data released by the China Association of the National Shipbuilding, meaning that demand for plate steel from China’s mills will plunge in the years ahead.
That’s why on Sunday the Beijing State Council made a rather remarkable announcement. To wit, it will close 100 million to 150 million tons of steel-making capacity. That would mean cutting capacity by an amount similar to the total annual steel output of Japan, the world’s No. 2 steel maker, and nearly double that of the US.
These are not simply gee whiz comparisons. It took the fastidious Japanese nearly five decades to erect the world’s leading steel industry on the back of tens of thousands of step-by-step engineering and operational improvements. China created the same tonnage each and every year after the financial crisis, but it was all based just on a great field of dreams exercise in pell mell expansion. Efficiency. longevity and steel-making technique were hardly an afterthought.
Nor is its own tail the only loss of market. Even more fantastic than steel has been the growth of China’s auto production capacity. In 1994, China produced about 1.4 million units of what were bare bones communist era cars and trucks. Last year it produced more than 23 million mostly western style vehicles or 16X more.
And, yes, that wasn’t the half of it. China has gone nuts building auto plants and distribution infrastructure. It is currently estimated to have upwards of 33 million units of vehicle production capacity. But demand has actually rolled over this year and will continue heading lower after temporary government tax gimmicks—– that are simply pulling forward future sales—–expire.
The more important point, however, is that as the China credit Ponzi grinds to a halt, it will not be building new auto capacity for years to come. It is now drowning in excess capacity, and as prices and profits plunge in the years ahead the auto industry CapEx spigot will be slammed shut, too.
Needless to say, this not only means that consumption of structural steel and rebar for new auto plants will plunge. It also will result in a drastic reduction in demand for the sophisticated German machine tools and automation equipment needed to actually build cars.
Stated differently, the CapEx depression already underway in China, Australia, Brazil and much of the EM will ricochet across the global economy. Cheap credit and mispriced capital are truly the father of a thousand economic sins.
China’s construction infrastructure, for example, is grotesquely overbuilt—— from cement kilns, to construction equipment manufacturers and distributors, to sand and gravel movers, to construction site vendors of every stripe. For crying out loud, in three recent year China used more cement than did the United States during the entire 20th century!
That is not indicative of a just a giddy boom; its evidence of a system that has gone mad digging, hauling, staging and constructing because there was unlimited credit available to finance the outpouring of China’s runaway construction machine.
The same is true for its machinery, solar and aluminum industries—to say nothing of 70 million empty luxury apartments and vast stretches of over-built highways, fast rail, airports, shopping mails and new cities.
In short, the flip-side of the China’s giant credit bubble is the most massive malinvesment of real economic resources—-labor, raw materials and capital goods—ever known. Effectively, the country-side pig sties have been piled high with copper inventories and the urban neighborhoods with glass, cement and rebar erections that can’t possibly earn an economic return, but all of which has become “collateral” for even more “loans” under the Chinese Ponzi.
China has been on a wild tear heading straight for the economic edge of the planet—-that is, monetary Terra Incognito— based on the circular principle of borrowing, building and borrowing. In essence, it is a giant re-hypothecation scheme where every man’s “debt” become the next man’s “asset”.
Thus, local government’s have meager incomes, but vastly bloated debts based on the collateral of stupendously over-valued inventories of land—-valuations which were established by earlier debt financed sales to developers.
Likewise, coal mine entrepreneurs face not only collapsing prices and revenues, but also soaring double digit interest rates on shadow banking loans collateralized by over-valued coal reserves. Shipyards have empty order books, but vast debts collateralized by soon to be idle construction bays. Speculators have collateralized massive stock piles of copper and iron ore at prices that are already becoming ancient history.
So China is on the cusp of the greatest margin call in history. Once asset values start falling, its pyramids of debt will stand exposed to withering performance failures and melt-downs. Undoubtedly the regime will struggle to keep its printing press prosperity alive for another month or quarter, but the fractures are now gathering everywhere because the credit rampage has been too extreme and hideous.
It is downright foolish, therefore, to claim that the US economy is decoupled from China and the rest of the world. In fact, it is inextricably bound to the global financial bubble and its leading edge in the form of red capitalism.
Bubblevision’s endlessly repeated mantra that China doesn’t matter because it only accounts for only 1% of US exports is a non sequitir. It does not require astute observation to recognize that Caterpillar did not export its giant mining equipment just to China; massive amounts of it went there indirectly by way of Australia’s booming iron ore provinces.
That is, until the global CapEx bust was triggered by two years of crumbling commodity prices. CAT’s monthly retail sales reports are a slow motion record of this unprecedented crash.
Thus, December US retail sales tumbled 10% over last year, following a 5% drop in November. But that was the optimistic part of its global results. Elsewhere December sales by its dealers were a complete debacle: The Asia/Pacific/China region was down by 21%; EAME dropped by 12%; and Latin America (i.e. Brazil) continued its free fall, dropping by 36% versus prior year.
Overall, CAT’s global retail sales posted a massive 16% drop in December compared to prior year—–a result tied for the worst annual decline since the financial crisis. And that comes on top of the 12% decline a year ago, another 9% in 2013, and -1% in 2012.
Moreover, four consecutive years of declines is not simply a CAT market share or product cycle matter. Its major Asian rivals have experienced even larger sales declines. Komatsu is down, for example, by 80% from its peak sales levels.
In the heavy machinery sector, therefore, the global CapEx depression is already well underway. There has been nothing comparable to this persisting plunge since the 1930s.
Likewise, the US did not export oil to China, but China’s vast, credit-inflated demand on the world market did artificially lift world oil prices above $100 per barrel, thereby touching off the US shale boom that is now crashing in Texas, North Dakota, Oklahoma and three other states. And the fact is, every net new job created in the US since 2008 is actually in these same six shale states.
Indeed, the rot that was introduced into the global economy by the world’s convoy of money printing central banks extends into nearly unimaginable places, owing to the false bubble prices for crude oil and other raw materials that were temporarily inflated by the global credit boom. Thus, the 5.6X explosion of global credit shown below had everything to do with the aberration of $100 per barrel oil and all the malinvestments and whacky distortions it spawned in places which harvested the windfall rents.
Global Debt and GDP- 1994 and 2014
To wit, Iraq is now so broke——–notwithstanding a 33% increase in oil exports last year——that it is petitioning the IMF for a bailout. Yet as recently as a year ago plans were proceeding apace to build the world tallest building at its oil country center at Basra.
That right. The “Pride of the Gulf” now has tin cup in hand and is heading for an IMF rescue. The monstrosity below will likely never be built, but it does succinctly symbolize the trillions that have been wasted around the world by lucky reserve owning companies and countries during the false boom that emanated from the Red Ponzi.
The planned “Bride of the Gulf” building in Basra. At a height of 1,152 meters, it would outdistance even the Jeddah Tower being built in Saudi Arabia.
Similarly, US exports to Europe have tripled to nearly $1 trillion annually since 1998, while European exports to China have more than quintupled. Might there possibly be some linkages?
In short, there is an economic and financial trainwreck rumbling through the world economy called the Great China Ponzi. In all of economic history there has never been anything like it. It is only a matter of time before it ends in a spectacular collapse, leaving the global financial bubble of the last two decades in shambles.
Forget the orderly transition myth. What happens when the iron ore ports go quiet, the massive copper stock piles on the pig farms are liquidated, the coal country turns desolate, the cement trucks are parked in endless rows, the giant steel furnaces are banked, huge car plants are idled and tens of billions of bribes emitted by the building boom dry up?
What happens is that giant economic cavities open up throughout the length and breadth of the Red Ponzi.
Industrial profits as a whole are already down 5% on a year over year basis, but in the leading sectors have already turned into read ink. In a few quarters China’s business sector, in fact, will be in the throes of a massive profits contraction and crisis.
Likewise, tens of millions of high paying jobs, and the consumer spending power they financed, will vanish. Also, the value of 70 million empty apartment units that had been preposterously kept vacant as a distorted form of investment speculation will plunge in value, wiping out a huge chunk of the so-called savings of China’s newly emergent affluent classes.
So where are all the consumers of services supposed to come from? After peak debt and the crash of China’s vast malinvestments, there will be no surplus income to recycle.
Most importantly, as the post-boom economic cavities spread in cancer like fashion and the crescendo of financial turmoil intensifies, the credibility of the regime will be thoroughly undermined. Capital flight will become an unstoppable tidal wave as the people watch Beijing lurch from one make-do fix and gimmick to the next, as they have during the stock market fiasco of the past two years.
In short, China will eventually crash into economic and civil disorder when the Red Suzerains go full retard with governance by paddy wagons, show trials, brutal suppression of public dissent and a return to Chairman Mao’s gun barrel as the ultimate source of communist party power.
Self-evidently, the Maoist form of rule did not work. But what is now becoming evident is that Mr.. Deng’s printing press has a “sell by” date, too
http://davidstockmanscontracorner.com/red-ponzi-ticking/
Chronicle Of A Debt Foretold
by John Rubino
January 22, 2016
Critics of today’s fiat currency/fractional reserve banking world have (for what seems like forever) made the common sense point that when debt rises faster than cash flow, bad things are bound to happen. In every cycle since 1980 this has been dismissed by the vast majority who benefit from inflating bubbles — until the bubble bursts.
And here we go again. The following chart from Stock Traders Daily shows the relationship between margin debt (money borrowed by investors against existing stock positions in order to buy more stock) and cash on hand in brokerage accounts. The idea is that when investors hold lots of cash they’re pessimistic, and when they borrow a lot they’re optimisitc. Extremes of either tend to signal changes in market direction. At the end of 2015 investors were even more excited than at the peak of the housing bubble, indicating that there’s not much retail money left to be tossed at US stocks.
China, being a little more bubbly than the US, is a good indicator of where US margin debt might be headed:
China margin debt Jan 16
Another red flag is being waved by corporate debt, much of which is being taken on to fund share repurchase programs. These tend to benefit shareholders in the moment but at the cost of higher leverage and less flexibility in the future. Where in the past net debt has tended to track EBITDA (a broad measure of earnings). starting in 2014 the former has soared beyond the latter. Just as a spike in margin debt implies a lack of retail stock buying in the future, soaring corporate debt implies limited borrowing power and a scale-back of share repurchases going forward.
Corporate debt vs EBITDA
Based on both history and common sense, we should expect not just a slowdown, but a cratering of equity demand from both individuals and corporations in the year ahead. What happens then? Either the market crashes and prices go back to levels that attract wiser capital, or a new source of dumb money emerges.
And that would be government. Already, the Bank of Japan owns more than half of the Japanese stock market. And now China — displaying its customary cluelessness about what markets are and how they work — is countering the recent bear market with public (which is to say borrowed) funds:
China Vice President Vows to ‘Look After’ Stock Market Investors
(Bloomberg) – China is willing to keep intervening in the stock market to make sure a few speculators don’t benefit at the expense of regular investors, China’s vice president said in an interview.
Calling the country’s market “not yet mature,” Vice President Li Yuanchao said the government would boost regulation in an effort to limit volatility.
“An excessively fluctuating market is a market of speculation where only the few will gain the most benefit when most people suffer,” Li told Bloomberg News after arriving at the World Economic Forum’s annual meeting in Davos, Switzerland. “The Chinese government is going to look after the interests of most of the people, most of the investors.”
Li, 65, is the most senior Chinese official yet to underline the government’s readiness to intervene should the market turmoil of last summer and the start of 2016 continue. So far this year, the Shanghai Composite and the Hang Seng China indexes have both lost more than 15 percent, even as the central bank injects cashinto the system to drive down borrowing costs and boost the economy.
Companies exchanging long term bonds for equities and individuals using equities as collateral to buy more tend to distort equity valuations, but only temporarily, as the players’ finite borrowing capacity is eventually maxed out and the buying has to stop.
Governments are a different story, since they can create trillions of dollars with a mouse click. Their ignorance is thus a lot more dangerous because it short-circuits price disclosure on a vast, potentially open-ended scale.
When a central bank buys equities, it doesn’t have teams of analysts running valuation studies and creating model portfolios. Presumably it just makes across-the-board purchases, which tends to float all boats. So the wheat doesn’t get separated from the chaff and capital has no idea where to flow. Malinvestment becomes rampant and the result is, well, what we have today: Chinese ghost cities, Japanese zombie companies and US tech unicorns worth billions before generating their first dollar of earnings. And that’s before the Fed and European Central Bank really get going.
http://dollarcollapse.com/money-bubble/chronicle-of-a-debt-foretold/
Is China About To Drop A Devaluation Bomb?
AutomaticEarth.com
January 27, 2016
Though she had no intention of being funny, we laughed out loud, as undoubtedly many did with us, when incumbent and wannabe IMF head Christine Lagarde said last week in Davos that China has a communication issue. Of course, Lagarde knows full well that Beijing has much bigger problems than communication ‘with the market’. Or, to put it differently, if Xi and Li et al would ‘improve’ their communication by telling the truth about their economy, nobody would be talking about communication anymore.
Mixed signals from China, which is attempting to shift its economy away from exports and investment to a consumer-driven model, have deepened concerns about the outlook for world growth, she said. Uncertainty is “something that markets do not like”, Ms Lagarde told a panel of business leaders and economic regulators in the snow-blanketed Swiss ski resort. Investors have struggled with “not knowing exactly what the policy is, not knowing exactly against what the renminbi is going to be valued”, she said, referring to China’s currency. “I think better and more communication will certainly serve that transition better.”
The world’s second-largest economy this week announced its 2015 GDP growth as 6.9%, its slowest in a quarter of a century. The figure cast a shadow over the summit, where IHS chief economist Nariman Behravesh told AFP that Chinese policymakers had “fumbled” and had “added to the uncertainty and the volatility by their behaviour”. Mr Fang Xinghai, the vice-chairman of China’s securities regulator, said at the same panel that “in terms of communication, we should do a better job”. “We have to be patient because our system is not structured in a way that is able to communicate seamlessly with the market,” he added.
The real issue is what people would think if Beijing announced a more realistic 2% or less GDP growth number. The thought alone scares Lagarde as much as anyone, including the Politburo. The sole option seems to be to keep lying as long as you can get away with it. But how and where the yuan will be valued by China itself has become entirely inconsequential compared to how markets value the currency.
The PBoC spent a fortune trying to straighten the offshore and onshore yuan(s), only to see the two diverge sharply again, as Shanghai stocks posted the biggest loss on Tuesday, at 6.4%, since the ‘unfortunate’ circuit breaker incident. That puts additional pressure on the Hong Kong dollar peg, and ultimately on the mainland China peg to whatever it is they’re trying to peg to.
Beijing might solve some of these problems by devaluing the yuan by 30%, or even 50%, but it would invite a large amount of other problems in the door if it did. Like a full-blown currency war. Still, it’s just a matter of time till Xi and Li either do it voluntarily or are forced to by ‘the market’.
What they are trying very hard NOT to communicate is how much pain their Ponzi debt burden has put them in. It’s not even fully clear to what extent Xi himself is aware of this, but he knows at least enough to keep his mouth shut on the topic. It’s quite possible that some of his top aides dare not reveal the real tally to their boss for fear of their jobs and heads.
In concert with denial and obfuscation, pride and hubris may be clouding the image the Chinese have of themselves and their economy. The rest of the world has followed them in that to a large degree, but it’s got to wake up at some point. If what the WSJ quotes a Beijing-based investor as saying is halfway true, and Xi realizes the opportunity it provides him, a huge devaluation may be imminent after all, if Shanghai shares keep falling the way they are.
Yuan’s Fall Is Just ‘Noise’ Amid Deeper China Woes
The country is already littered with “zombie” factories, empty apartment blocks that form ghostly suburbs, mothballed power stations and other infrastructure that nobody needs. But yet more wasteful projects are in the pipeline, even as the government talks about cutting industrial overcapacity. “That’s the misalignment—everything else is noise,” says Rodney Jones, the Beijing-based principal of Wigram Capital Advisors, who was a partner at Soros Fund Management during the 1990s. If debt keeps piling up at the current rate, China faces an eventual financial crisis, perhaps leading to years of subpar growth, mirroring the fate of Japan after its bubble burst in the early 1990s.
Mr. Jones argues that global equity markets haven’t property adjusted to this risk, even after a 16% decline in U.S. dollar terms from their May peak. “The world will have to learn to live without demand from China,” he says. “It’ll come as a shock.” A sharp devaluation won’t fix these distortions, and might even make matters worse if, as likely, it were to trigger financial mayhem in China’s trading partners. An alternative—further clamping cross-border currency controls—would be a humiliating retreat from Beijing’s policy of making the yuan more international.
If China imports continue to fall the way they have recently, a development that has already relentlessly hammered global commodities markets and exporting emerging nations, the advantages of a large devaluation could become irresistible even for a proud president. With capital flight in 2015 estimated at $1 trillion, and a roughly equal chunk of foreign reserves thrown at attempts to ‘stabilize’ the yuan, that pride is getting costly.
But it occureed to me today that perhaps I simply haven’t been cynical enough yet when pondering the matter. The support for a strong yuan, the one thing that is constantly ‘communicated’ to the world, may be just another facade. Beijing may have long decided to go for the jugular. China will have to adjust to the popping of its growth fairy tale and Ponzi economy no matter what it tries to do to prevent it.
Might as well swallow the bitter pill in one go then and get it over with?! It would make exports much more attractive at a time when more expensive imports are much less of an issue. As nice example is the very disappointing sales of iPhones in the country, prompting this comment from Apple CEO Tim Cook today: “We’re seeing extreme conditions unlike anything we’ve experienced before just about everywhere we look.” I think he might want to consider that what happened before was extreme, not what is now.
Beijing did a few things recently that triggered my cynicism radar. First, they targeted George Soros.
China Accuses George Soros Of ‘Declaring War’ On Yuan
Chinese state media has stepped up a salvo of biting commentaries against George Soros and other currency traders as the yuan comes under pressure, with the billionaire investor accused of “declaring war” on the unit. At the annual World Economic Forum in Davos last week, Soros told Bloomberg TV that the world’s second-largest economy was heading for more troubles. “A hard landing is practically unavoidable,” he said. Soros [..] pointed to deflation and excessive debt as reasons for China’s slowdown.
[..] Soros “publicly ‘declared war’ on China”, the paper said, citing the 85-year-old as saying that he had taken positions against Asian currencies. But some readers questioned whether the official rhetoric could fuel Chinese investors’ fears. “They say a lot of loud slogans, but do official media even know that Chinese investors are in hell?” said one poster on social media network Weibo. “I’m afraid that Chinese investors will die in a stampede before Soros even shows his hand.”
And I’m thinking: why should you go after Soros in a very public way when you know the whole world will take note and there’s nothing you can do other than stomp your feet and thump your chest? “Look, everyone, the world’s most notorious and successful short seller is after us, but we’re so much smarter!” Maybe they think Chinese mom and pop investor juggernauts will fall for their ‘whatever it takes’ tale, but they have to deal with the entire planet here.
Could this be simple stupidity? At a certain point that gets hard to believe. An even better example, and one that is really brow-raising, was the announcement of an inquiry into China’s statistics chief:
Head Of China’s Statistics Bureau Investigated For Corruption
The head of China’s statistics bureau is being investigated for corruption, the country’s watchdog said on Tuesday. “Wang Baoan is suspected of severe disciplinary violations, he is currently under investigation,” the Central Commission for Discipline Inspection said in a one-line statement on its website, using a phrase that is usually used to refer to corruption. The announcement came just hours after Wang appeared at a media briefing in Beijing on China’s economy in 2015. Last week the National Bureau of Statistics released data that showed China’s economy grew at the slowest pace in 25 years. Wang reiterated on Tuesday that the country’s GDP calculations were reliable, Chinese media reported, despite widespread criticism of the data.
Here’s a guy seeking to soothe his audience, which in present circumstances includes the whole globe, and you cut him off at the knees just hours after? He says all’s fine, and then you sent a message to the world that he can’t be trusted?
The timing seems crucial here. They could have waited a week, or two, so the connection between the two events (Wang’s statement and the inquiry announcement) would have been much less obvious. They could also, of course, have had the inquiry but kept it hush-hush. Instead, as in the Soros case, there’s a big public declaration.
Wang is head of a statistics bureau that, says the NYT, is tasked with:
Inquiry in China Adds to Doubt Over Reliability of Economic Data
The statistics bureau has a variety of responsibilities that are hard to balance even in the best of times. The bureau is supposed to provide China’s leaders with an unvarnished assessment of the country’s economic strengths and weaknesses, even while reassuring the public about growth and maintaining consumer confidence. It is also supposed to release enough detailed and accurate information for investors and corporate leaders to make sound decisions about economic and financial prospects.
That leads us right back to the start of this article. Wang must provide “enough detailed and accurate information” for investors”, but how can he do that if the real numbers are as bad as I strongly think they are? In that case, accurate information would drive most investors away and drive others towards shorting the yuan.
He must also “provide China’s leaders with an unvarnished assessment of the country’s economic strengths and weaknesses”, and perhaps he screwed up there (too much varnish). Xi may have found out something real bad that Wang didn’t tell him about. But even then, the fact stands that Xi risks triggering exactly what he pretends to want to prevent, by taking this to the press.
To summarize: yes, it’s possible that Beijing has a communication problem. I’ve never had the idea that Xi understands that now his power dream has come true, he finds that power is not absolute, if and when he wishes to have a financial market that allows for China to get richer through trade. That he realizes the price to pay for that is having much less than total control.
Still, after glancing through this stuff, I wouldn’t be at all surprised if the decision for a very substantial devaluation of the yuan has already been taken. It would be a panic move, with largely unpredictable consequences, but then Beijing has plenty to panic about.
And I can’t wait to see what Lagarde has to say when she figures out her new currency basket baby turns around to bite her in the ass.
http://www.theautomaticearth.com/2016/01/is-china-about-to-drop-a-devaluation-bomb/
Finland’s universal income idea could transform economics and politics
By Guy Sorman
27 January 2016
Career politicians have become incredibly boring, which explains the appearance of rebel parties in every Western democracy. These new splinter groups include the Ciudadanos in Spain, the Front National in France, several years ago the Tea Party in the United States, and the Independentists in Catalonia and Scotland. It seems voters have understandably grown tired of accepting the same old tunes whistled from both the left and the right.
As soon as politics becomes show business, a demand for renewal is created. And not just for superficial reasons. The constantly recycled old programmes offer no solutions to difficult, long-term and often hereditary problems such as unemployment among the unqualified youth, or the excessive dependence of certain groups on the welfare state. The same goes for the debate on immigration, which is plagued by symmetrical discourses either battling against globalization or nationalism. These approaches have no practical effect, as migrants alone choose where they go.
New ideas are far from lacking however, and are incessantly provided by economists and sociologists in universities, laboratories, foundations and as part of published studies and books. But anyone would think that politicians read nothing, and content themselves with the advice of their closed circle of marketing consultants and dried-up slogan manufacturers.
This context adds an extra, stimulating twist to the ground-breaking innovation being prepared in Finland: universal basic income (UBI), often referred to by economists as a negative income tax. The concept is nothing new and is often attributed to Milton Friedman, who defended it with passion and flair in the 1980s. Regardless of its inventor, this concept was already available on the global ideas market and has been revived today.
The Finnish government plans to introduce the initiative this year, hoping to grant every adult citizen a monthly allowance of 800 euros, regardless of their income and situation. Whether rich or poor, each person will then be free to use this money as they see fit, based on the idea that each person, rich or poor, is responsible for their actions. If someone decides to spend their 800 euros on vodka, that is their decision, and has nothing to do with the government. In return this income implies the removal of most welfare services, which until now were granted by the government, based on income and obligatorily aimed at specific situations such as housing, children’s education and… property insulation.
The suppression of these specific welfare programs should free up enough public resources to finance the UBI, thereby creating a zero-sum game. The bureaucracy that currently governs welfare payments would become obsolete, and disappear. There would no longer be any need to ask for government help, nor to fill out forms or wait for the competent authorities to examine each dossier to decide whether it is eligible or not.
The UBI should loosen the hold of public bureaucracy over Finnish citizens, and reverse a century of socialization from the top down. In practice, each citizen would automatically receive their monthly allowance, and would have to fill out a tax declaration form and reintegrate the allowance into their taxable income. The poorest citizens who does not pay income tax would keep their entire allowance, while other, higher-earners would repay a relative portion of their allowance in tax, which would provide the concept with a certain progressivity.
Despite such promising prospects, the Devil is in the detail, and we still do not know whether this allowance will replace every welfare programme, or if some will be maintained, such as help for the disabled.
One quite remarkable, extraordinary aspect of this project is that every major Finnish political party has approved it, showing it is neither left-wing nor right-wing. The left are reassured by seeing the arrival of government assistance for all as a form of universal socialism. And the right praises the unprecedented drop in bureaucratic control over citizens, an unheard-of extension of freedom of choice, and an unconditional restitution of part of citizens’ taxes.
The Finnish government is also expecting to enjoy beneficial effects on employment and growth. Regardless of age, the underqualified will be more willing to accept poorly-paid jobs, knowing they will continue to receive their UBI. By the same token, employers will be more willing to hire and fire, as the UBI will act as a social dampener. As national wealth figures always depend on the number of employed citizens, Finland is hoping for a clear growth spurt.
The allowance may also regulate migrant influxes if the government decides to only grant the UBI to citizens and legal residents. This project is so simple and apolitical that it begs the question why it has never been applied before. After all, the concept has been known to and lauded by economists for 50 years. We can only assume the political and bureaucratic classes fear innovation, and even more so the loss of any influence over society. The removal of a large swathe of the welfare state will in turn remove the ability to buy votes.
If the Finnish experiment works, all of Europe would follow suit. A similar situation occurred in the early 1980’s when American monetarism imposed itself and stemmed inflation, and when the British privatization trend became globalized. Perhaps in the future we will refer to a “Finnish model”, which will make ordinary politics more interesting, governments less heavy-handed and citizens more responsible.
http://capx.co/a-new-economic-model-from-finland/
Guy Sorman is a contributing editor of City Journal, a French public intellectual, and author of many books, including Economics Does Not Lie.
Clueless in Davos
Peter Schiff
Jan. 26, 2016
Making their annual pilgrimage to the exclusive Swiss ski sanctuary of Davos last week, the world's political and financial elite once again gathered without having had the slightest idea of what was going on in the outside world. It appears that few of the attendees, if any, had any advance warning that 2016 would dawn with a global financial meltdown.
The Dow Jones Industrials posted the worst 10 day start to a calendar year ever, and as of the market close of January 25, the Index is down almost 9% year-to-date, putting it squarely on track for the worst January ever. But now that the trouble that few of the international power posse had foreseen has descended, the ideas on how to deal with the crisis were harder to find in Davos than an $8.99 all-you-can-eat lunch buffet.
The dominant theme at last year's Davos conference, in fact the widely held belief up to just a few weeks ago, was that thanks to the strength of the American economy the world would finally shed the lingering effects of the 2008 financial crisis. Instead, it looks like we are heading straight back into a recession.
While most economists have been fixated on the supposed strength of the U.S. labor market (evidenced by the low headline unemployment rate), the real symptoms of gathering recession are easy to see: plunging stock prices and decreased corporate revenues, bond defaults in the energy sector and widening spreads across the credit spectrum, rising business inventories, steep falls in industrial production, tepid consumer spending, a deep freeze of business investments and, of course, panic in China.
The bigger question is why this is all happening now and what should be done to stop it.
As for the cause of the turmoil, fingers are solidly pointing at China and its slowing economy (with very little explanation as to why the world's second largest economy has just now come off the rails). And since everyone knows that Beijing's policymakers do not take advice from the Western financial establishment, the only solutions that the Davos elite can suggest is more stimulus from those central banks that do listen.
Interviewed on an investment panel in Davos, American multi-billionaire and hedge fund manager, Ray Dalio, perhaps spoke for the elite masses when he said, "...every country in the world needs an easier monetary policy." In other words, despite years (decades in Japan) of monetary stimulus, in the form of low, zero, and, in some cases, negative interest rates, and trillions of dollars in purchases of assets through Quantitative Easing (QE) programs, what the world really needs is more of the same. Lots more. Despite the fact that no country that has pursued these policies has yet achieved a successful outcome (in the form of sustainable growth and a subsequent return to "normal" monetary policy), it is taken as gospel truth that these remedies must be administered, in ever-greater dosages, until the patient improves. No one of any importance in Davos, or elsewhere for that matter, seems willing to question the efficacy of the policies themselves. And since the U.S. Federal Reserve is the only central bank officially considering policy tightening at present, Dalio's comments should be seen as squarely addressing the Fed. But apparently they were not.
While economists are calling for central banks in Brussels, Beijing, and Tokyo to pull out more of the monetary stops, few have called for the Federal Reserve in Washington to do the same. Most on Wall Street are, publicly at least, supporting rate increases from the Fed, albeit at a slower pace than what was envisioned just a few months, or even weeks, ago. As many economists were very public in excoriating the Fed for moving too slowly in 2015, perhaps they are unwilling to admit that their confidence was misplaced. Many also may realize the colossal embarrassment that would await Fed policymakers if they were to reverse policy so quickly. To have waited nearly 10 years to raise interest rates in the U.S., only to cut rates less than three months later would be to admit that the Fed was both clueless AND ineffective. This could cause an even greater panic as investors became aware that there is no one flying the plane.
But perhaps the main reason other central bankers are reluctant to urge the Fed to ease is that the United States is supposedly the poster boy that proves quantitative easing actually works. After all, the rest of the world is being told to emulate the successes that were achieved in the U.S. Ben Bernanke had the courage to act while European central bankers were too timid, and the result was not only full employment and a recovery strong enough to withstand higher rates in the U.S., but a best-selling book and magazine covers for Bernanke. The world's central bankers are not quite ready to consign Bernanke's book to the fiction section where it rightfully belongs, as it would call into question their own commitment to following a failed policy.
But some doubt is starting to creep in publicly. An underlying headline in a January 25 story in the Wall Street Journal finally said what most mainstream pundits have refused to say: "Fed is a key reason markets have plunged and risk of recession is rising." But even in that article, which analyzes why six years of zero percent interest rates created bubble-like conditions that were vulnerable to even the small pin that a 25-basis point increase would provide, the Journal was reluctant to say that the Fed should begin to ease policy. At most, they seemed to urge the Fed to call off any future increases until the market could adjust and digest what has already happened.
However, George Soros, another legendary hedge fund billionaire (with a well-known political agenda), is dipping his toes in that controversial pool, by nearly telling the Fed that the time had come to face the music and eat some humble pie. In an interview with Bloomberg Television's Francine Lacqua on January 17, Soros claimed that the Fed's decision to raise rates in December was "a mistake" and that he "would be surprised" if the Fed were to compound the mistake by raising rates again. (Officially the Fed has forecast that it is likely to boost rates four times in 2016). When pressed on whether the Fed would actually do an about-face and cut rates, Soros would simply say that "mistakes need to be corrected and it [a Fed reversal] could happen." Look for many more investors to join the crowd and call for a reversal, regardless of the loss of credibility it would cause Janet Yellen and her crew.
But when I publicly made similar statements months ago, saying that if the Fed were to raise rates, even by a quarter point, the increase would be sufficient to burst the stock bubble and tip the economy into recession, my opinions were considered completely unhinged. My suggestion that the Fed would have to later reverse policy and cut rates, after having raised them, was looked at as even more outrageous, akin to predicting that the U.S. would be invaded by Canada. Now those pronouncements are creeping into the mainstream.
I was able to see through to this scenario not because I have access to some data that others don't, but because I understood that stimulus in the form of zero percent interest rates and quantitative easing is not a means to jump start an economy and restore health, but a one-way cul-de-sac of addiction and dependency that pushes up asset prices and creates a zombie economy that can't survive without a continued stimulus. In the end, stimulus does not create actual growth, but merely the illusion of it.
This is consistent with what is happening in the global economy. China is in crisis because commodities and oil, which are priced in dollars, have sold off in anticipation of a surging dollar that would result from higher rates. The financial engineering that has been made possible by zero percent interest rates is no longer available to paper over weak corporate results in the U.S. Our economy is addicted to QE and zero rates, and without those supports, I feel strongly we will spiral back into recession. This is the reality that the mainstream tried mightily to ignore the past several years. But the chickens are coming home to roost, and they have a great many eggs to lay.
Investors should take heed. The bust in commodities should only last as long as the Fed pretends that it is on course to continue raising rates. When it finally admits the truth, after its hand is forced by continued market and economic turmoil, look for the dollar to sell off steeply and commodities and foreign currencies to finally move back up after years of declines. The reality is fairly easy to see, and you don't need an invitation to Davos to figure it out.
http://www.europac.com/commentaries/clueless_davos
The Market's Troubling Message
By Ashoka Mody
Jan. 27, 2016
Amid one of the worst market routs on record, a chorus of reassuring economic commentators insists that global fundamentals are sound and investors are overreacting, behaving like a panicked herd. Don’t be so sure.
Consider how wrong economists have been about the effects of the 2008 financial debacle. In April 2010, the International Monetary Fund declared the crisis over and projected annualized global growth of 4.6 percent by 2015. By April 2015, the forecast had declined to 3.4 percent. When the weak last quarter’s results are released, the reality will probably be 3 percent or less.
Economists are used to linear models, in which changes follow a relatively gradual and predictable path. But thanks in part to the political and economic shocks of recent years, we live in a highly non-linear world. The late Danish physicist Per Bak explained that after long absences, earthquakes come in quick succession. A breached fault line sends shock waves that weaken other fault lines, spreading the vulnerabilities.
The subprime crisis of 2007 breached the initial fault line. It damaged U.S. and European banks that had indulged in its excesses. The Americans responded and controlled the damage. Euro-area authorities did not, making them even more susceptible to the Greek earthquake that hit in late-2009. Europeans kept building temporary shelters as the banking and sovereign debt crisis gathered force, never constructing anything that would hold as new fault lines opened.
Enter China, which briefly held the world economy together amidst the worst of the crisis. Just in 2009, the Chinese pumped in credit equal to 30 percent of gross domestic product, boosting demand for global commodities and equipment. Germans benefited in particular from the demand for cars, machine tools, and high-speed rails. This activated supply chains throughout Europe.
But China is becoming more a source of risk than resilience. The number to look at is not Chinese GDP, which is almost certainly a political statement. The country's imports have collapsed. This is troubling because it is the epicenter of global trade. Shockwaves from China can test all the global fault lines, making it a potent source of financial turbulence.
Only China can undo its excesses. Its vast industrial overcapacity and ghost real estate developments must be wound down. As that happens, large parts of the financial system will be knocked down. The resulting losses will need to be distributed through a fierce political process. Even if the country's governance structure can adapt, the required deep-rooted change could cause China’s slowdown to persist for years.
Beyond China, Europe remains the most serious fault line. Italian banks are saddled with bad loans. As in much of the euro area, authorities had hoped the banking problems would go away. Now, though, the government will need to bear some of the losses, weakening Italy’s already fragile public finances. At 134 percent of GDP, the country's sovereign debt is barely sustainable. Worse, the economy is stagnant: Per capita GDP is lower today than in 1999, when Italy adopted the euro. A country that does not grow cannot repay its debts.
Briefly out of sight, Greece and its creditors are engaged in an endless war of attrition. The creditors -- Germany in particular -- remain mindlessly committed to fiscal austerity, which the battered Greek economy will no longer bear. If Greece ultimately leaves the euro area, the entire currency union could unravel.
As in China, Europe’s fundamental problem is an obsolete political and governance structure. Managing so many nations in a semi-hierarchical system under German hegemony can no longer work. The continuing tragedy of the refugee crisis may be the unanticipated but final blow.
One reason the tremors have persisted so long, and are inflicting so much damage, is that the primary driver of better living standards -- productivity growth -- has been exceedingly weak. In turn, persistent economic distress is weighing heavily on vulnerable populations, fomenting anger and forcing sometimes disruptive political change.
Financial markets often do get things wrong. But they are better than economists in sensing non-linearities, the critical junctures where fundamental shifts occur. Politics, economics, and finance are threatening to move the tectonic plates. This is a bad moment to look the other way.
http://www.bloombergview.com/articles/2016-01-27/the-market-s-troubling-message
Oil Inventory Hits "Levels Not Seen in 80 Years"; Crude Jumps on News Russia May Cooperate with OPEC
Mike "Mish" Shedlock
Jan. 26, 2016
"Levels Not Seen in 80 Years"
The supply glut in oil storage continues as crude. Inventories hit new all-time highs this past week.
The above charts from EIA Weekly Supply Data shows the crude inventory of 494,920,000 (not counting strategic reserves) passed the previous high of 490,912,000 set on April 24, 2015.
Reserves, including the Strategic Petroleum Reserve (SPR), reached 1,190,038 barrels, also a record high.
Comments From EIA Weekly Report
Here are some interesting comments from the Weekly EIA Report.
"At 494.9 million barrels, U.S. crude oil inventories remain near levels not seen for this time of year in at least the last 80 years. Total motor gasoline inventories increased by 3.5 million barrels last week, and are well above the upper limit of the average range. Both finished gasoline inventories and blending components inventories increased last week. Distillate fuel inventories decreased by 4.1 million barrels last week but are near the upper limit of the average range for this time of year. Propane/propylene inventories fell 6.2 million barrels last week but are well above the upper limit of the average range. Total commercial petroleum inventories decreased by 1.0 million barrels last week."
Crude Jumps on News Russia May Cooperate with OPEC
Despite the record inventory surge, crude jumped a bit from extremely oversold levels on news Russia Dangles Prospect of OPEC Cooperation.
Oil futures surged on Wednesday, after Russia said it was discussing the possibility of co-operation with OPEC, fanning hopes that a deal was in the works to reduce oversupply that sent prices the lowest levels in a dozen years last week.
Russia's energy ministry said possible coordination with the Organization of the Petroleum Exporting Countries (OPEC) was discussed at a meeting with Russian oil companies on Wednesday.
"I remain skeptical, at the end of the day, about that happening as the oil producers are looking at the other guy to cut production while maintaining their own levels," Andrew Lipow of Lipow Oil Associates said.
Crude was looking firm before the Russia news on the back of a U.S. Energy Department report showing a surprise spike in demand for refined products like heating oil last week, when a massive blizzard hit the U.S. Northeast.
The U.S. Energy Information Administration said inventories of distillates, fell more than 4 million barrels, trumping expectations for a rise of about 2 million.
Economists Surprised Again
Despite the small drawdown in fuel oil please recall the report stated "Distillate fuel inventories are near the upper limit of the average range for this time of year."
Economists can be surprised by anything including the possibility blizzards and cold weather may increase the demand for fuel oil in the Northeast!
http://globaleconomicanalysis.blogspot.com/2016/01/oil-inventory-hits-levels-not-seen-in.html#spuq54rODfVyl2Fy.99
Earnings take a dark turn as profit warnings, sales misses mount
Jan 27, 2016
Earnings season took a dark turn on Wednesday, when the majority of companies reporting numbers for the December quarter missed on sales and lowered their outlook for the rest of the year.
Coming after Apple Inc.’s AAPL, +0.41% revenue miss from late Tuesday, the news was a grim reminder that corporate America is struggling to generate growth after years in which massive sums were spent on share buybacks instead of investing for growth.
This weakness in overall corporate earnings growth could bode badly for the broader stock market, as it represents the actual impact of geopolitical concerns, the slowdown in China, the weakness in oil prices and productivity, said Karyn Cavanaugh, senior market strategiest at Voya Investment Management.
“Earnings discount all the noise,” said Cavanaugh said. “It’s the best unbiased view of what’s going on in the global economy.”
Among Dow Jones Industrial Average DJIA, +0.77% components, Boeing Inc. BA, +0.16% offered guidance for 2016 that fell way below current expectations, forecasting a slowdown in commercial airplane deliveries for the year. United Technologies Inc. missed revenue by a staggering $1 billion as all units suffered declines.
Elsewhere, companies reported sharp declines in profit. Fiat Chrysler FCAU, -3.36% profit fell 40%, Ferrari N.V. RACE, +0.59% profit slid 34%, Novartis A.G. NVS, -1.79% profit fell 57%, Hess Corp. HES, +9.31% said its loss deepened to $1.82 billion from $8 million a year ago and Norfolk Southern Corp. NSC, +1.88% said it would cut 2,000 jobs and downsize its rail lines after profit tumbled a worse-than-expected 29%.
On the top line, U.S. Steel Corp. X, +0.24% sales fell 37%, Tupperware Brands Corp. TUP, +1.48% sales fell 13%, State Street Corp. STT, -0.64% revenue fell about 5% and Cliffs Natural Resources Inc. CLF, +0.01% revenue fell 54%.
Companies that lowered their earnings guidance included Textron Inc. TXT, +1.36% Illinois Tool Works Inc. ITW, +1.86% St. Jude Medical Inc. STJ, +0.65% and Rockwell Automation Corp. ROK, -0.62%
On Tuesday, Johnson & Johnson JNJ, +0.30% Procter & Gamble Co. PG, +0.55% DuPont Co. DD, +0.29% Coach Inc. COH, +2.54% Corning Inc. GLW, +0.84% and Freeport-McMoRan Inc. FCX, -5.70% all missed revenue estimates for the December quarter.
The S&P 500 is on track for its fourth straight season of negative sales, according to FactSet data, the longest such negative streak since the four-quarter stretch from the fourth quarter of 2008 to the third quarter of 2009. The S&P 500 index SPX, +0.85% has fallen 7% in the last 12 months.
So far, 22.4% of S&P 500 companies have reported, and the index is looking at a median decline in sales of 3.6%, wider than 3.5% reading a day ago, according to FactSet. That’s the data provider’s blended growth rate, which includes those companies that have reported as well as the estimates for the rest.
Per-share earnings are looking at a deeper decline of 6.3%, wider than the 6.2% reading on Tuesday, according to FactSet. That would be a third straight quarter that earnings decline.
The decline in earnings could hurt share prices more than it did last year. Considering the Federal Reserve has started tightening the stimulus spigot by raising interest rates last month, Cavanaugh said investors have to start looking at earnings more critically than they have been.
“When the Fed was back-stopping everything, people were willing to pay a little more for earnings,” Cavanaugh said. Now, she said the question has become: “Why would you pay more for the same exact thing you got last year?”
http://www.marketwatch.com/story/earnings-take-a-dark-turn-as-profit-warnings-sales-misses-mount-2016-01-27?siteid=YAHOOB
Time to freak out: 4 reasons the global economy is completely screwed
Salon.com
Jan 26, 2016
A fresh blast of cold air swept across global financial and commodity markets on Wednesday, raising fears that the world economy could be heading toward a recession — one perhaps even bigger than the last one.
Further falls in crude oil prices were the catalyst for the widespread sell-off as investors from New York to London dumped stocks. The Dow Jones Industrial Average was down more than 500 points at one point, and US crude fell below $27 a barrel, its lowest level since May 2003.
The alarming combination of plunging stock markets, sinking oil prices, collapsing emerging market currencies and the slowdown in China has left many market participants wishing 2016 was over already.
The renewed panic comes as political and business leaders gather in the Swiss Alps town of Davos for the World Economic Forum, which is likely to be dominated by the turmoil in global markets.
“The situation is worse than it was in 2007. Our macroeconomic ammunition to fight downturns is essentially all used up,” William White, the Swiss-based chairman of the Organization for Economic Cooperation and Development’s policy review committee and former economic advisor at the Swiss-based Bank for International Settlements, told The Telegraph in Davos.
The signs were there before Wednesday’s market woes. US billionaire investor George Soros has warned that global markets are facing a 2008-style crisis as China makes the difficult transition from an export-driven economy to one that is more reliant on domestic consumption.
“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,” Soros told an economic forum earlier this year, Bloomberg reported.
So, is it time to start stashing your savings under the mattress?
Here are four reasons why you should be very worried about the state of the global economy.
1. EMERGING MARKET DEBT CRISIS
Blame the US Federal Reserve for this one.
Since the Fed lowered interest rates to near zero during the financial crisis, the world has been flooded with cheap money. Emerging market companies, banks and governments have responded by taking out dollar-denominated loans. Now that US interest rates are rising again and the dollar is strengthening, those debts are becoming a lot more expensive to pay back.
“Emerging markets were part of the solution after the Lehman crisis. Now they are part of the problem too,” the OECD’s White told The Telegraph.
2. STOCK MARKETS ARE PLUNGING
If you were thinking about taking an early retirement and living off the fat of your financial market investments, think again.
Wall Street is having its worst start to a year ever, with the S&P 500 falling more than 8 percent in less than three weeks. The losses have spread like a bad flu to other regions — China and Japan have tumbled into bear markets and London’s FTSE 100 looks set to join them. (The technical definition of a bear market is a fall of 20 percent or more from a recent high). European markets are deep in negative territory, too.
With the International Monetary Fund downgrading its global economic growth forecasts for this year and next, citing the ongoing problems with China and weak commodity prices, now is not the time to be perfecting your golf putt.
3. SUPER-LOW OIL PRICES
Global oil prices have plunged in the past 18 months and key benchmarks have begun trading below $30 a barrel, the lowest level in more than a decade, as a global glut and China growth fears weigh on demand. The International Energy Agency warned Tuesday the oil market could “drown in oversupply.” Sounds scary, right? It is.
Many businesses and consumers are cheering the low oil prices because it means gasoline is cheaper, which reduces their costs and gives them more money to spend. But there’s a downside. When oil is too cheap it can fuel deflation. One reason that’s bad for an economy is that if consumers believe prices will fall further, they might delay making purchases, pushing down prices even more and creating a dangerous downward spiral. The domino effects can be devastating. Falling oil prices can also be a sign that economic activity is slowing.
4. CHINA IS SLOWING DOWN
The latest data show China’s economy grew at its slowest pace in 25 years in 2015, confirming fears that the world’s growth engine is losing steam. It expanded by 6.9 percent last year, compared with 7.3 percent in 2014.
China’s deceleration has huge economic implications, now and in the long term. While the slowdown is partly a consequence of Beijing’s efforts to wean the country off its addiction to export-driven growth, there are fears that Chinese leaders could lose their nerve and further devalue the currency to prop up the country’s labor-intensive manufacturing sector. That could lead to a damaging global currency war and undermine confidence in China.
http://www.salon.com/2016/01/26/time_to_freak_out_4_reasons_the_global_economy_is_completely_screwed_partner/
The Fed vs. Congress
Martin Armstrong
Jan. 25, 2016
I understand that central banks have been demonized and the great conspiracy centers around their ability to create money. Creating money is not really the issue for the amount they have created is peanuts compared to the continued debt created by politicians. Congress just created $1 trillion-plus in December 2015 and nobody noticed.
We need central banks as a clearing mechanism and to maintain reserves of member banks. The problem is that central banks are not all created the same. Jackson destroyed the Bank of the United States, which did not engage in quantitative easing and had no such power to create elastic money. They simply lent money to Jackson’s opponents. The destruction of the central bank resulted in the Panic of 1837 and the sovereign defaults of the states during the 1840s that occurred after the states had issued debt in an attempt to bailout state banks that went nuts without a central bank to control anything.
This constant attack on central banks is really hiding what the problem truly is — government. When the Fed was created, it “stimulated” the economy by purchasing corporate paper. The Fed was NEVER intended to buy government bonds. The politicians did that for World War I and never returned it to its purpose. Then FDR grabbed it and ordered the Fed to buy government bonds at PAR, which was not removed until 1951.
The problem is always politicians. We need to ELIMINATE public debt and outlaw the federal government from borrowing since it never pays anything back. The Fed’s ability to create money to help the economy in a crisis was limited by its design to buy short-term corporate paper. The private sector has to pay its debts. So the right to “create” temporary money made sense for it was eliminated when the corporate paper was redeemed. This was short-term paper.
Even today, the Fed has all this government debt it bought under quantitative easing. It too will be reversed, but they bought long-term debt. That increase in the money supply will contract upon expiration of the debt. Technically, debt is repaid once it expires, and the money created by the Fed vanishes. That is still elastic money.
Eliminating the central banks will not save our future. That would push us over the edge as Jackson did. We need to eliminate government debt and return the Fed to its original design and knock off this manipulation of the Fed for political gain.
Make no mistake about it: the Fed stating interest rates MUST be normalized is not going to help fiscal policy. This is now a war over integrity and we should stop bashing the Fed and start yelling at the real culprits.
As far as when the central banks will come to an end from a clearing perspective — hopefully never. As a government tool to manipulate society, their days are numbered and 2020 looks like a good place to start. If the debt collapses, then the central banks can return to their original function. Those who want to shut down the Federal Reserve would only destroy the economy exactly as Andrew Jackson did.
http://www.armstrongeconomics.com/archives/42351
A Central Banker Fesses Up (almost)
Kevin Duffy
Jan. 22, 2016
William White, the Swiss-based chairman of the OECD’s review committee and former chief economist of the Bank for International Settlements (the central banker’s central bank), recently made some frank statements about future debt defaults from Davos, reported here by Ambrose Evans-Pritchard. We parsed his comments and responded with a few of our own:
“The situation is worse than it was in 2007. Our macroeconomic ammunition to fight downturns is essentially all used up,” said William White.
Their ammo is used up. That may be a good thing since all the central bankers can do with their interventions is cause mischief. That won’t prevent them from trying.
“Debts have continued to build up over the last eight years and they have reached such levels in every part of the world that they have become a potent cause for mischief,” he said.
“It will become obvious in the next recession that many of these debts will never be serviced or repaid, and this will be uncomfortable for a lot of people who think they own assets that are worth something,” he told The Telegraph on the eve of the World Economic Forum in Davos.
All enabled by Central Bankers Gone Wild. Since 2007 the Fed’s balance sheet quintupled. The rest of the world’s central bankers followed suit. The debt followed: cause and effect.
“The only question is whether we are able to look reality in the eye and face what is coming in an orderly fashion, or whether it will be disorderly. Debt jubilees have been going on for 5,000 years, as far back as the Sumerians.”
It will be disorderly and there is nothing the central bankers can do to stop it. Year-to-date action in financial markets has been very orderly.
That will change.
The next task awaiting the global authorities is how to manage debt write-offs – and therefore a massive reordering of winners and losers in society – without setting off a political storm.
No!!! The next task should be to shut down the entire central banking operation. I guess we’re going to have to endure even more pain as the central banks compound their mistakes… once again.
Mr. White said Europe’s creditors are likely to face some of the biggest haircuts. European banks have already admitted to $1 trillion of non-performing loans: they are heavily exposed to emerging markets and are almost certainly rolling over further bad debts that have never been disclosed.
We agree. Deutsche Bank is this cycle’s Lehman Brothers. We are heavily short.
The European banking system may have to be recapitalized on a scale yet unimagined, and new “bail-in” rules mean that any deposit holder above the guarantee of €100,000 will have to help pay for it.
Get ready. The euro zone is headed down the bailouts-for-banks path.
The warnings have special resonance since Mr. White was one of the very few voices in the central banking fraternity who stated loudly and clearly between 2005 and 2008 that Western finance was riding for a fall, and that the global economy was susceptible to a violent crisis.
What a telling quote! Correct, these guys do not see around corners. Nearly all of them failed to anticipate the 2008 meltdown. Even when the subprime cracks appeared, nearly all thought the cancer was contained. It wasn’t just 2008. Interventionist economists missed the 1929 crash and 1970s inflation, failed to identify the 1989 Japan bubble and 2000 tech bubble, and thought the Soviet economy was exemplary before it collapsed in the late 1980s.
Mr. White said stimulus from quantitative easing and zero rates by the big central banks after the Lehman crisis leaked out across east Asia and emerging markets, stoking credit bubbles and a surge in dollar borrowing that was hard to control in a world of free capital flows.
The result is that these countries have now been drawn into the morass as well. Combined public and private debt has surged to all-time highs to 185pc of GDP in emerging markets and to 265pc of GDP in the OECD club, both up by 35 percentage points since the top of the last credit cycle in 2007.
“Emerging markets were part of the solution after the Lehman crisis. Now they are part of the problem too,” Mr. White said.
Spot on. My jaw is on the floor. I can’t believe any central banker would admit how much they screwed things up by trying to prop up the financial system in 2008.
Mr. White said QE and easy money policies by the US Federal Reserve and its peers have had the effect of bringing spending forward from the future in what is known as “inter-temporal smoothing”. It becomes a toxic addiction over time and ultimately loses traction. In the end, the future catches up with you. “By definition, this means you cannot spend the money tomorrow,” he said.
True statement. There is a reason people defer spending: so they can invest today and have more in the future. Central bank suppressing of interest rates breaks the regulator on this behavior, encouraging more spending today. People are under the illusion that they can have their cake and eat it, too. Unfortunately, there are no free lunches in economics.
A reflex of “asymmetry” began when the Fed injected too much stimulus to prevent a purge after the 1987 crash. The authorities have since allowed each boom to run its course – thinking they could safely clean up later – while responding to each shock with alacrity. The BIS critique is that this has led to a perpetual easing bias, with interest rates falling ever further below their “Wicksellian natural rate” with each credit cycle.
This is central-banker-speak for “moral hazard.” Thank you very much Alan Greenspan for inventing the “Plunge Protection Team.” Also, thanks to Robert Rubin, nicknamed “Mr. Bailout” (for good reason).
“Responding to each shock with alacrity?” This is an understatement. With each crisis the response has been exponentially greater. The 2008 variant saw global central bank balance sheets probably go up 3-4 times and interest rates taken to zero for 8 years!
The error was compounded in the 1990s when China and eastern Europe suddenly joined the global economy, flooding the world with cheap exports in a “positive supply shock”. Falling prices of manufactured goods masked the rampant asset inflation that was building up. “Policy makers were seduced into inaction by a set of comforting beliefs, all of which we now see were false. They believed that if inflation was under control, all was well,” he said.
This is a muddled statement, but revealing. China joined the world economy in the 1990s, an unmitigated positive. And yes, this extra supply masked underlying inflation. But who caused that inflation? Central bankers, of course. Were they “seduced into inaction?” Well, not exactly. They were doing what they normally do: suppressing interests below the market level. They should have gone to inaction: let interest rates rise to their natural level. The revealing part of this statement is that central bankers are always fighting the bogeyman of deflation. This is dangerous and what always give them an excuse to meddle. Btw, if we’re going into debt defaults and asset declines, central bankers will have plenty of excuses to “fight deflation.”
Btw, a similar mistake was made in the mid to late 1920s when the Fed tried to “stabilize the price level.” With electrification, new inventions and productivity gains, consumer prices should have gone down. However, the Fed would not tolerate the dreaded “deflation” so they printed money. Consumer prices were strangely (and unnaturally) flat during the second half of the 1920s. In retrospect, most of the Fed’s inflation went into asset prices, blowing a great bubble. This didn’t end well, if my recollection of history is correct.
In retrospect, central banks should have let the benign deflation of this (temporary) phase of globalisation run its course. By stoking debt bubbles, they have instead incubated what may prove to be a more malign variant, a classic 1930s-style “Fisherite” debt-deflation.
Correct. I doubt they’ve learned the lesson.
Mr. White said the Fed is now in a horrible quandary as it tries to extract itself from QE and right the ship again. “It is a debt trap. Things are so bad that there is no right answer. If they raise rates it’ll be nasty. If they don’t raise rates, it just makes matters worse,” he said.
Checkmate. The best they can do is shut down the operation and do something productive, like work as greeters for Wal-Mart.
There is no easy way out of this tangle. But Mr. White said it would be a good start for governments to stop depending on central banks to do their dirty work. They should return to fiscal primacy – call it Keynesian, if you wish – and launch an investment blitz on infrastructure that pays for itself through higher growth.
Bad idea!!! More government “stimulus” can only make matters worse. If Mr. White is so concerned about high debt levels, why is he encouraging even more government debt?
“It was always dangerous to rely on central banks to sort out a solvency problem when all they can do is tackle liquidity problems. It is a recipe for disorder, and now we are hitting the limit,” he said.
No, all they can do is wreak havoc.
http://bearingasset.com/blog/2016/01/a-central-banker-fesses-up-almost/
Red flag: Oil company defaults are spiking
by Heather Long
January 22, 2016
American oil companies are starting to scream "mayday."
Last year, 42 North American drillers filed for bankruptcy, according to law firm Haynes and Boone. It's only likely to get worse this year.
Experts say there are a lot of parallels between today's crisis and the last oil crash in 1986. Back then, 27% of exploration and production companies went bust.
Defaults are skyrocketing again. In December, exploration and production company defaults topped 11%, up from just 0.5% the previous year, according to Fitch Ratings. That's a 2,000%-plus jump.
It's just the beginning, says John La Forge, head of real assets strategy at Wells Fargo. If history repeats, people should prepare for the default rate to double in the next year or so.
No wonder America's biggest banks are setting aside a lot of money in anticipation that more energy companies will go belly up.
Oil prices plunged 70%
Energy companies borrowed a lot of money when oil was worth over $100 a barrel. The returns seemed almost guaranteed if they could get the oil out of the ground. But now oil is barely trading just above $30 a barrel and a growing number of companies can't pay back their debts.
"The fact that a price below $100 seemed inconceivable to so many is kind of astonishing," says Mike Lynch, president of Strategic Energy and Economic Research. "A lot of people just threw money away thinking the price would never go down."
On the last day of 2015, Swift Energy, an "independent oil and gas company" headquartered in Houston, became the 42nd driller to file for bankruptcy in this commodity crunch. The company is trying to sort out over $1 billion in debt at a time when the firm's earnings have declined over 70% in the past year. Trimming costs and laying off workers can't close that kind of gap.
"In the 1980s, there was a bumper sticker that people in Texas had that said, 'God give me one more boom and I promise not to screw it up,'" says Lynch. "People should have those bumper stickers ready again."
A lot like 1986
The last really big oil bust was in the late 1980s. The Saudis really controlled the price then, says La Forge. Now the Saudis (and other members of OPEC) are in a battle with the United States, which has become a major player again in energy production.
No one wants to cut back on production and risk losing market share.
"It will be the U.S. companies that go out of business," predicts La Forge. OPEC countries don't have a lot of smaller players like the United States does. It's usually the government that controls oil drilling and production in OPEC nations. La Forge predicts the governments can hold their position longer.
As the smaller players run out of cash, they will get swallowed up by bigger ones.
"The big boys and girls will snap up a lot of cheap assets," predicts Lynch.
Are oil prices set to rebound?
There's a lot of debate about whether oil prices have bottomed out. Crude oil hit its lowest price since 2003 this week. But even if prices have stabilized, the worst isn't over for oil companies.
"Some companies went under in 1986-'87 even when prices rebounded," says La Forge.
This week, Blackstone (BGB) CEO Stephen Schwarzman said his firm is finally taking a close look at bargains in the energy sector.
One of the largest bankruptcies so far is Samson Resources of Oklahoma. In 2011, private equity firm KKR (KKR) bought it for over $7 billion. Now it's struggling to deal with over $1 billion in debt that's due this year alone.
Companies are using bankruptcy to restructure -- a code word for eliminating debt or not paying creditors back in full. Hercules Offshore, another Houston-based company, filed for bankruptcy over the summer. It has already emerged from it.
Concerns of what's ahead have sent jitters through the junk bond market. The energy sector makes up about a fifth of the high-yield bond index. A panic in the junk bond market in December dragged stocks down temporarily too.
CNNMoney (New York)
First published January 22, 2016: 1:39 PM ET
http://money.cnn.com/2016/01/22/investing/oil-crisis-defaults-rise/index.html
This is Why Junk Bonds Will Sink Stocks: Moody’s
by Wolf Richter
January 24, 2016
“Some very critical things are hidden.”
After the white-knuckle sell-off of global equities that was finally punctuated by a rally late last week, everyone wants to know: Was this the bottom for stocks? And now Moody’s weighs in with an unwelcome warning.
If you want to know where equities are going, look at junk bonds, it says. Specifically, look at the spread in yield between junk bonds and Treasuries. That spread has been widening sharply. And look at the Expected Default Frequency (EDF), a measure of the probability that a company will default over the next 12 months. It has been soaring.
They do that when big problems are festering: The Financial Crisis was already in full swing before the yield spread and the EDF reached today’s levels!
And so, John Lonski, chief economist at Moody’s Capital Markets Research, has a dose of reality for stock-market bottom fishers:
For now, it’s hard to imagine why the equity market will steady if the US high-yield bond spread remains wider than 800 basis points [8 percentage points]. Taken together, the highest average EDF metric of US/Canadian non-investment-grade companies of the current recovery and its steepest three-month upturn since March 2009 favor an onerous high-yield bond spread of roughly 850 basis points.
Moody’s EDF began spiking last summer and has nearly doubled since then to 8%, the highest since 2009.
The average spread between high-yield bonds and Treasuries has widened to 813 basis points (8.13 percentage points). But at the lower end of the junk-bond spectrum (rated CCC and below), the yield spread is a red-hot 18.4 percentage points.
This chart shows the average high-yield spread (blue line) and the CCC-and-below spread (black line). Note how far we were already into the Financial Crisis before both spreads reached the today’s levels: March 13, 2008, and September 30, 2008, respectively:
So how does the yield spread impact equities and the broader economy?
A wider-than 800 basis-point high-yield spread reflects elevated risk aversion that will reduce capital formation and spending by non-investment-grade businesses. In addition, ultra-wide bond yield spreads favor a continuation of equity market volatility that should sap the confidence of businesses and consumers.
Which has consequences for stock prices.
Yield Spreads and EDF sink M&A.
The premium over market price that acquiring companies pay has been rocket fuel for share price increases in entire sectors as analysts hype the potential for all these companies to receive buyout offers with huge premiums.
Last year, US M&A activity (involving at least one US company) soared to $3.34 trillion, a record 18.6% of US GDP. The prior record was 17.8% of GDP in Q1 2000, just before the dotcom bubble began to implode. The report:
A cresting by M&A may offer valuable insight regarding the state of the business cycle. The two previous yearlong peaks for US company M&A were set in Q3-2007 at $2.213 trillion and in Q1-2000 at $1.745 trillion. Recessions struck within one year of each of those peaks.
But the markets didn’t wait for those official recessions. Stocks began their multi-year crash at the end of those quarters!
The buyout frenzy is funded in part by large amounts of debt. As corporations lever up, risks rise and downgrades hail down on them. In 2015, M&A-related “net downgrades” (difference between M&A-related downgrades and upgrades) by Moody’s rose to 36. This year, Moody’s expects them to increase further.
The M&A activity last year was fueled by low borrowing costs, high stock market valuations, and “diminished prospects for organic revenue growth,” as Moody’s put it euphemistically: S&P 500 companies waded through four quarters in a row of revenue declines!
The importance of the latter helps to explain why record highs for M&A tend to occur close to the end of a business cycle upturn. The urge to merge will be greater the more convinced corporations are of the imperative to meet long-term earnings targets via mergers, acquisitions, or divestitures.
M&A is the easy way to growth. But it comes at a high price, increased financial instability, subsequent downsizing and cost-cutting, and slow-moving waves of layoffs that then sap consumer demand and the economy.
Yield spreads and EDF sink share buybacks.
“In order to supply a more immediate lift to shareholder returns,” Lonski writes, companies lower total shares outstanding by buying back their own shares. This lowers the dilution that occurs when they issue new shares for M&A and executive compensation. These financial engineering tactics have been another type of rocket fuel underneath the market.
“A more uncertain earnings outlook,” as the report euphemistically calls the ongoing three-quarter earnings recession for S&P 500 companies, “will increase the incentive” to engage in share buybacks “as opposed to investing such funds in a company’s production capabilities.”
This leads to even more problems:
Sometimes, efforts to enhance shareholder returns trigger credit rating downgrades. Typically, strategies which benefit shareholders at the expense of creditors employ cash- or debt-funded equity buybacks and dividends.
So Moody’s downgrades stemming from “shareholder compensation” rose to 48 in 2015 but were still shy of the record 78 in 2007, at the cusp of the Financial Crisis.
At some point, market volatility, which means downward volatility because no one lambastes upward volatility, will put a damper on M&A and share buybacks, thus knocking over two of the remaining props under the market.
And more ominous still:
The two latest recessions were partly the consequence of markets not knowing the full extent of deteriorations in household and business credit quality. Not everything can be quantified, if only because some very critical things are hidden.
Ah yes, we won’t even really know how bad it is with our over-leveraged corporate heroes until the house of cards comes down to reveal what’s left inside.
But nothing goes to heck in a straight line.
Read… After $7.8 Trillion Got Wiped Out in three Weeks, “Global Stocks Surge Most since 2012” http://wolfstreet.com/2016/01/23/after-7-8-trillion-got-wiped-out-in-three-weeks-global-stocks-surge-most-since-2012/
http://wolfstreet.com/2016/01/24/moodys-sours-on-stocks/
How Billionaires Are Investing In 2016: "The Only Winning Move Is Not To Play The Game"
01/23/2016
Ever since 2009, when we first showed how broken the capital markets are first at the micro level, thanks to the pervasive spread of parasitic, frontrunning algos, and then at the macro, as a result of constant, artificial central bank intervention and levitation, we have advised readers that the best option is to simply avoid rigged, manipulated markets altogether. Now, 7 years later, the world's richest people agree.
Remember when we warned virtually every single day for the past 7 years that constant central bank and HFTs manipulation will lead to a market so broken nobody will have any faith in price discovery or asset valuation until everything collapses and is rebuilt from scratch? Well, we are delighted to announce that this is now conventional wisdom, and as a result every so-called "prominent investor" is now resistant to putting on fresh positions and expected asset prices to head downward, according to the WSJ.
In short, they say, the only winning move is not to play the game.
It's not just that: according to WSJ reporting from the just concluded symposium of billionaires, prominent investors and other hypocrites in Davos, the consensus is that "the world’s central banks can’t save us anymore."
The next WSJ sentence is absolutely epic: "Their mood here was irritated, bordering on affronted, with what they say has been central-bank intervention that has gone on too long."
Oh yeah, they had no problem with central bank intervention for 1, 2, 3, 4, 5, or even 6 consecutive years... but seven? Now that's just absurd!
The WSJ goes on to vindicate all so-called tinfoil fringe websites by admitting that "from this anecdotal sampling, at least, that has created growing distortions in nearly all asset prices—from stocks to bonds to real estate."
But... fundamentals?
Great job central bankers and other central planners: the one thing you just had to save at any cost, the market, pardon the "market", even if it meant crushing the middle class, is no longer credible - not even to the smartest people in the room.
"The trade now is to hold as much cash as possible,” said Nikhil Srinivasan, chief investment officer for Generali, a European insurer with $480 billion in assets. "Equity markets could go down 15% to 20%."
Or much more: after all the S&P is only in the vicinity of 1900 instead of 666 thanks to 7 years of central bank intervention. Pull the rug, and you get a 70% collapse.
Srinivasan said the central banks in the U.S. and Europe have done all that is possible, bringing rates to historic lows, and in Europe weakening the Euro to help sustain exports. Markets need to “stop expecting miracles,” he said, “now it’s time for the fiscal side to do its job.”
Actually, all central banks have done is delay mean reversion by injection trillions in liquidity which not only did not end up in the economy where it was not requested due to a complete collapse in demand, but simply inflated asset prices to record levels. Now even the wealthiest admit that the day of reckoning is coming.
The sentiment was the same for Axel Weber, the chairman of UBS AG. He said in a panel at Davos that: “There may be no limit to what the ECB is willing to do but there is a very clear limit to what QE can and will achieve,” he said, referring to the European Central Bank. “The problem is that monetary policy has largely run its course.”
Which is funny considering the only reason for the market rebound of the past two days was promises and hopes of more stimulus. Monetary policy may have "run its course" but the same billionaires will be delighted to get a few extra final hits before it all comes crashing down.
Added one other CEO of a major global financial firm: “The sickness is not inflation, it’s the mispricing of assets.”
The realization that Western economies will be growing slowly—and there was little that the central banks may do to aid—put financial executives here in something of a stupor.
The Netherlands, for instance, is experiencing negative interest rates. "We have limited opportunities to lend on the other side” of customer deposits because of those negative yields, said Ralph Hamers, the chairman of Dutch bank ING NV. “The only thing we can do is extend credit we would normally not do, and that leads to an accident waiting to happen.”
For Mr. Hamers and others, a shift in sentiment seemed to be taking hold. Annual growth of the old order—3% to 4% for the U.S. and other Western economies, is far away. Absent structural changes led by governments, there was little reason to be cheered.
One person who has also been warning about this terminal outcome for years is Elliott Management chief Paul Singer who said that "if central banks double down on their policies of QE, ZIRP and NIRP, it could cause a loss of confidence in central bankers, paper money in general, or one or more currencies, and lead to a collapse in bonds and stock prices."
He is, of course, right, and incidentally this "thought scenario" is precisely what will happen because as we have repeatedly said, not a single economy or fiat system in the history of the world has disintegrated from deflation: governments and their central bank owners will always find a way to reflate, even if it means dropping money out of helicopters, even if it means destroying a reserve currency. And, as Venezuela most recently found out the very hard way, in the end, only hard assets remain - assets such as gold, which have preserved their value across the centuries.
As for these "prominent investors" who were anything but and merely rode the central bank wave for over half a decade, the fun is over. For him, “we call it the new abnormal and we better get used to it.”
What a coincidence that even the world's richest are suddenly using terms first coined on this website all the way back in 2010, almost as if we were right from day one.
Now, anyone interested in a nice game of chess?
http://www.zerohedge.com/news/2016-01-23/how-billionaires-are-investing-2016-only-winning-move-not-play-game
How Much Will Markets Fall? Top Investors See No Bottom Yet
John Gittelsohn
January 20, 2016
Investment managers are warning that markets probably have further to fall as China’s growth slows, oil prices plunge and central bankers lack tools to prop up economies.
The Standard & Poor’s 500 Index will drop another 10 percent to 1,650 and oil could fall as low as $20 a barrel as investors flee for safety, according to Scott Minerd, chief investment officer of Guggenheim Partners. Jeffrey Rottinghaus, whose T. Rowe Price mutual fund beat 99 percent of rivals over the past year, said stock prices could fall another 10 percent as the U.S. economy slips into a mild recession.
"I expect a protracted decline in the S&P 500," Jeffrey Gundlach, co-founder of DoubleLine Capital, said in an e-mailed response to questions. "Investors should sell the bounce-back rally which could come at any time."
The S&P 500 and Dow Jones Industrial Average are down about 8 percent for the year, and both tumbled more than 3.5 percent on Wednesday before recovering. The S&P 500 was up about 1.4 percent to 1,886.07 at 12:29 p.m. in New York, while the Dow rose 1.5 percent. Oil rose 5.5 percent to $29.92.
Rottinghaus, manager of the $203 million T. Rowe Price U.S. Large-Cap Core Fund, said "industrials and commodities have been in a recession for at least six months" in the U.S. “What we are trying to figure out is how much that bleeds into the consumer side of the economy," he said in an interview.
Waiting for a Catalyst
Russ Koesterich, global chief investment strategist at BlackRock Inc., said there needs to be a fundamental catalyst to signal a market bottom, whether it comes from corporate earnings, economic data or an improvement in China.
"You need to have some stabilization of fundamentals to give people conviction this has gone too far," Koesterich, whose firm is the world’s largest money manager, said in an interview. "Certainly you are getting closer to capitulation. The magnitude of the drop suggests that."
Hedge fund manager Ray Dalio said global markets face risks to the downside as economies near the end of a long-term debt cycle. The Federal Reserve’s next move will be toward quantitative easing, rather than monetary tightening, the founder of Bridgewater Associates said in an interview with CNBC from the World Economic Forum in Davos. That won’t be easy, because rates are already so low, he said.
Risks to Downside
“When you hit zero, you can’t lower interest rates anymore,” Dalio said, according to a transcript of the interview. “That end of the long-term debt cycle is the issue that means that the risks are asymmetric on the downside because risks are comparatively high at the same time there’s not an ability to ease.”
The rout in global stocks is being fueled by investors seeking to reduce leverage as central banks run out of options to prop up economies, according to Janus Capital Group Inc.’s Bill Gross.
“Real economies are being levered with QEs and negative interest rates to little effect,” Gross, who manages the $1.3 billion Janus Global Unconstrained Bond Fund, said in an e-mail responding to questions from Bloomberg. “Markets sense this lack of growth potential and observe recessions beginning in major emerging-market economies.”
While overseas economies are wobbling, the U.S. remains an island of stability, according to money managers such as Omar Aguilar, chief investment officer for equities at Charles Schwab Corp.
A Stable Economy
"This is a financial crisis and not an economic crisis," Aguilar said during a conference call. "The U.S. economy is stable."
Data on the housing market, unemployment and government spending still support U.S. gross domestic product growth, Aguilar said. Oil markets will rise later this year when supply drops in response to current low prices, according to Mihir Worah, co-manager of the $89.9 billion Pimco Total Return Fund.
“We continue to expect oil markets to balance in the second half of the year, and expect oil prices to move higher from current levels as a result,” Worah said in an e-mail. “While we aware of the risks, we still expect U.S. GDP growth to come in around 2 percent.”
David Herro, manager of the $24 billion Oakmark International Fund, said low energy prices should support consumer spending, the biggest part of the U.S. economy.
“I don’t think the drop in equity prices is at all warranted by economic fundamentals,” Herro wrote in an e-mail.
Mitchell Julis, co-founder of Canyon Capital Advisors, which has more than $20 billion in assets, said in an interview on Bloomberg <GO> that his Los Angeles-based hedge fund is sitting on 20 percent cash, a conservative stance for the firm, which is waiting for the right moment to start buying. While personal consumption hasn’t picked up quite yet, Julis said, his team is looking at the debt of retailers J. Crew Group, Inc. and Neiman Marcus Group Ltd.
Canyon avoided the bonds of energy companies last year, said Julis, and “it’s still too early.” He said eventually he would look toward larger companies like Exxon Mobil Corp., after the drop in oil has been priced into their securities.
http://www.bloomberg.com/news/articles/2016-01-20/how-much-lower-will-markets-go-top-investors-see-no-bottom-yet
A $1.1 Trillion Ticking Time Bomb—-Why The Fed Is Petrified Of Shrinking Its Massive Balance Sheet
by ZeroHedge
January 20, 2016
The Fed may have officially tapered QE at the end of 2014 but that doesn’t mean it is done buying Treasuries: since the Fed never ended rolling over maturing paper, it means that it will remain indefinitely active in the open market. And while there were no sizable maturities from the Fed’s various QEs to date (only $474 million in 2014 and $3.5 billion in 2015) that will change dramatically this year, when Brian Sack’s team will have to purchase about $216 billion to replace matured TSYs. According to JPM calculations, this represents half the net new government debt that will be issued over the next 12 months.
The amounts rise from there: $194 billion comes due in 2017, about $373 billion in 2018 and $329 billion in 2019 for a grand total of $1.1 trillion over the next four years as shown in the following Bloomberg chart:
The Fed’s intervention in the Treasury market is well known: here is a brief Bloomberg summary of where we’ve been and where we are going:
The Fed is the biggest holder of the government’s debt. Its $2.5 trillion hoard, amassed in a bid to support the economy after the financial crisis, is more of a focus for some investors than the trajectory of interest rates. From this month through 2019, about $1.1 trillion of Treasuries in the portfolio are set to mature.
Even though the Fed’s holdings of Treasurys won’t rise and remain flat at about $2.5 trillion, the Fed’s reinvestment mandate means a return to active POMO which also means that there will remain a backstop net buyer for 1 of every 2 bonds issued by the US government.
Clearly this is bullish for bond bulls (one can stop wondering why year after year Goldman is so bearish on TSYs every year with its 3.00% yield target and is so eager to buy everything its clients have to sell) for whom “the Fed’s signals that it will roll over the obligations have been another reason to doubt the consensus forecast that yields will rise in 2016. If officials had chosen to stop funneling that money into new debt, the government would likely have to boost borrowing in the market by roughly an equivalent amount this year, potentially pushing up Treasury yields.”
Hypotheticals aside, the Fed’s indirect monetization of debt has led to the Fed being the owner of about 30% of all 10-Year equivalents currently, further leading to dramatic notional scarcities among CUSIPs that were most actively purchased by the open markets desk, usually in the form of Off The Run paper, which meant that the Fed has far less On The Turn to lend to Treasury shorts in repo, leading to major “special” prints in the repo market manifesting by near-fail, or -3.00%, levels when one wishes to borrow any given Treasury.
However, as Bloomberg explains, as the Fed will rolls over maturing Treasuries, it will add new On The Run issues to its balance sheet. Since Operation Twist, the Fed has had less of those sought-after securities to lend out in a daily program it has to ease shortages in the market. As a result, these Treasuries have frequently commanded a premium in the repo market — leading more trades to go uncompleted, or ‘fail,’ in bond parlance.
If the Fed’s stock of those Treasuries grows, the central bank should be better able to alleviate the shortages through its SOMA Securities Lending program, said Joseph Abate, a money-market strategist in New York at Barclays Plc, a primary dealer.
It will become “easier for people to access the securities they need to cover any shorts in the on-the-runs and, correspondingly, the level of fails should fall,” Abate said. “The more difficult it is to cover a short, the less liquidity there is in the market.”
Dealers say bond trading has become more difficult as regulator-imposed risk limits make it costlier for banks to transact in all types of debt. While Treasuries remain one of the most liquid global markets, failing trades rose this month to about 2.5 percent of average daily volume, from about 1 percent before Twist, according to Barclays. The dollar amount of uncompleted Treasuries trades reached the highest since 2011 last month, Fed data show.
The topic of soaring repo “fails” was covered recently, and is shown in the chart below: a direct function of the Fed’s encroachment in the open market.
Then there is the question of remitting interest payments back to the Treasury, about as close to directly funding the US government as it gets (with the exception of course of the Fed directly paying $19 billion to fund the Highway Bill: that was undisputed direct funding of the US government by the banks that make up the Federal Reserve system). According to Bloomberg, if the Fed had opted not to reinvest this year, the Treasury would have had to make up for the lost funding with additional debt sales that might have boosted 10-year yields by 0.08-0.12 percentage point, according to Priya Misra at TD Securities LLC.
One wonders just how much more debt the Treasury will have to issue and how much higher yields will go up by if the Fed ever does unwind its balance sheet?
It also leads to another question: why did the Fed decide to begin the “normalization” process by hiking rates first instead of first removing the truly unorthodox support for asset classes, namely unwinding its balance sheet, or at least stopping the reinvestment of maturing bonds. The answer: because the Fed’s rate hike is a farce, further compounded by the fact that the Fed Funds rate on December 31, the only day it actually matters for bank balance sheet purposes, was well below the Fed’s 25bps floor.
But that’s a topic for another post.
For now, we leave it to Mark MacQueen, co-founder of Sage Advisory Services Ltd., which manages $12 billion in Austin, Texas, to explain precisely why those who are long assets could care less about nominal rate hikes but are terrified of the Fed’s actual balance sheet unwind: “The Fed tightening gave us little worry, but the unwind of the balance sheet gives us major worries. The Fed is keenly aware that the balance sheet has a much greater impact on the overall yield levels in the markets going forward than raising rates.”
And there’s your answer why the Fed is hiking instead of winding down its gargantuan $4.5 trillion balance sheet: it might actually achieve the intended effect.
http://davidstockmanscontracorner.com/a-1-1-trillion-ticking-time-bomb-why-the-fed-is-petrified-of-shrinking-its-massive-balance-sheet/
The Fed's Stunning Admission Of What Happens Next
zerohedge.com
01/17/2016
Following an epic stock rout to start the year, one which has wiped out trillions in market capitalization, it has rapidly become a consensus view (even by staunch Fed supporters such as the Nikkei Times) that the Fed committed a gross policy mistake by hiking rates on December 16, so much so that this week none other than former Fed president Kocherlakota openly mocked the Fed's credibility when he pointed out the near record plunge in forward breakevens suggesting the market has called the Fed's bluff on rising inflation.
All of this happened before JPM cut its Q4 GDP estimate from 1.0% to 0.1% in the quarter in which Yellen hiked.
To be sure, the dramatic reaction and outcome following the Fed's "error" rate hike was predicted on this website on many occasions, most recently two weeks prior to the rate hike in "This Is What Happened The Last Time The Fed Hiked While The U.S. Was In Recession" when we demonstrated what would happen once the Fed unleashed the "Ghost of 1937."
As we pointed out in early December, conveniently we have a great historical primer of what happened the last time the Fed hiked at a time when it misread the US economy, which was also at or below stall speed, and the Fed incorrectly assumed it was growing.
We are talking of course, about the infamous RRR-hike of 1936-1937, which took place smack in the middle of the Great Recession.
Here is what happened then, as we described previously in June.
[No episode is more comparable to what is about to happen] than what happened in the US in 1937, smack in the middle of the Great Depression. This is the only time in US history which is analogous to what the Fed will attempt to do, and not only because short rates collapsed to zero between 1929-36 but because the Fed’s balance sheet jumped from 5% to 20% of GDP to offset the Great Depression.Just like now.
Follows a detailed narrative of precisely what happened from a recent Bridgewater note:
The first tightening in August 1936 did not hurt stock prices or the economy, as is typical.
The tightening of monetary policy was intensified by currency devaluations by France and Switzerland, which chose not to move in lock-step with the US tightening. The demand for dollars increased. By late 1936, the President and other policy makers became increasingly concerned by gold inflows (which allowed faster money and credit growth).
The economy remained strong going into early 1937. The stock market was still rising, industrial production remained strong, and inflation had ticked up to around 5%. The second tightening came in March of 1937 and the third one came in May. While neither the Fed nor the Treasury anticipated that the increase in required reserves combined with the sterilization program would push rates higher, the tighter money and reduced liquidity led to a sell-off in bonds, a rise in the short rate, and a sell-off in stocks. Following the second increase in reserves in March 1937, both the short-term rate and the bond yield spiked.
Stocks also fell that month nearly 10%. They bottomed a year later, in March of 1938, declining more than 50%!
Or, as Bank of America summarizes it: "The Fed exit strategy completely failed as the money supply immediately contracted; Fed tightening in H1’37 was followed in H2’37 by a severe recession and a 49% collapse in the Dow Jones."
* * *
As it turns out, however, the Fed did not even have to read this blog, or Bank of America, or even Bridgewater, to know the result of its rate hike. All it had to do was to read... the Fed.
But first, as J Pierpont Morgan reminds us, it was Charles Kindleberger's "The World in Depression" which summarized succinctly just how 2015/2016 is a carbon copy of the 1936/1937 period. In explaining how and why both the markets and the economy imploded so spectacularly after the Fed's decision to tighten in 1936, Kindleberger says:
"For a considerable time there was no understanding of what had happened. Then it became clear. The spurt in activity from October 1936 had been dominated by inventory accumulation. This was especially the case in automobiles, where, because of fears of strikes, supplies of new cars had been built up. It was the same in steel and textiles - two other industries with strong CIO unions."
If all off this sounds oddly familiar, here's the reason why: as we showed just last week, while inventories remain at record levels, wholesale sales are crashing, and the result is that the nominal spread between inventories and sales is all time high.
The inventory liquidation cycle was previewed all the way back in June in "The Coming US Recession Charted" long before it bacame "conventional wisdom."
Kindleberger continues:
When it became evident after the spring of of 1937 that commodity prices were not going to continue upward, the basis for the inventory accumulation was undermined, and first in textiles, then in steel, the reverse procees took place.
Oil anyone?
And then this: "The steepest economic descent in the history of the United States, which lost half the ground gained for many indexes since 1932, proved that the economic recovery in the United States had been built on an illusion."
Which, of course, is what we have been saying since day 1, and which even such finance legends as Bill Gross now openly admit when they say that the zero-percent interest rates and quantitative easing created leverage that fueled a wealth effect and propped up markets in a way that now seems unsustainable, adding that "the wealth effect is created by leverage based on QE’s and 0% rates."
And not just Bill Gross. The Fed itself.
Yes, it was the Fed itself who, in its Federal Reserve Bulletin from June 1938 as transcribed in the 8th Annual General Meeting of the Bank of International Settlements, uttered the following prophetic words:
The events of 1929 taught us that the absence of any rise in prices did not prove that no crisis was pending. 1937 has taught us that an abundant supply of gold and a cheap money policy do not prevent prices from falling.
If only the Fed had listened to, well, the Fed.
What happened next? The chart below shows the stock market reaction in 1937 to the Fed's attempt to tighten smack in the middle pf the Great Depression.
If the Fed was right, the far more prophetic 1937 Fed that is not the current wealth effect-pandering iteration, then the market is about to see half its value wiped out.
http://www.zerohedge.com/news/2016-01-17/feds-stunning-admission-what-happens-next
A Loophole Allows Banks – But Not Other Companies – to Create Money Out of Thin Air
George Washington.com
01/15/2016
The central banks of the United States, England, and German - as well as 2 Nobel-prize winning economists - have all shown that banks create money out of thin air ... even if they have no deposits on hand.
The failure of most governments and most mainstream economists to understand this fact - they instead believe the myth that people make deposits at their bank, and these deposits are then lent out to new borrowers - is the main cause of our rampant inequality and economic problems.
But how do banks actually make loans before they have sufficient deposits on hand?
Economics professor Richard Werner - the creator of quantitative easing - noted in September that the field of economics has been lost in the woods for an entire century because it has failed to understand how banks actually create money.
Professor wrote an academic paper in 2014 concluding:
What banks do is to simply reclassify their accounts payable items arising from the act of lending as ‘customer deposits’, and the general public, when receiving payment in the form of a transfer of bank deposits, believes that a form of money had been paid into the bank.
***
The ‘lending’ bank records a new ‘customer deposit’ and informs the ‘borrower’ that funds have been‘deposited’ in the borrower's account. Since neither the borrower nor the bank actually made a deposit at the bank—nor, in connection with this transaction, anyone else for that matter, it remains necessary to analyse the legal aspects of bank operations. In particular, the legality of the act of reclassifying bank liabilities (accounts payable) as fictitious customer deposits requires further, separate analysis. This is all the more so, since no law, statute or bank regulation actually grants banks the right (usually considered a sovereign prerogative) to create and allocate the money supply. Further, the regulation that allows only banks to conduct such creative accounting (namely the exemption from the Client Money Rules) is potentially being abused through the act of‘renaming’ the bank's own accounts payable liabilities as ‘customer deposits’ when no deposits had been made, since this is also not explicitly referred to in the banks' exemption from the Client Money Rules, or in any other statutes, laws or regulations, for that matter.
Professor Werner explained:
Although the implementation of banking services relies heavily on accounting, hardly any scholarly literature exists that explains in detail the accounting mechanics of bank credit creation and precisely how bank accounting differs from corporate accounting of non-bank firms.
***
It can be deduced that this ability of banks is likely derived from the operational, that is, accounting conventions and regulations of banking. These either differ from those of non-banks, so that only banks are able to create money, or else non-banks have missed out on the significant opportunities money creation may afford.
In order to identify the difference in accounting treatment of the lending operation by banks, we adopt a comparative accounting analysis perspective.
***
When the non-financial corporation, such as a manufacturer, grants a loan to another firm, the loan contract is shown as an increase in assets: the firm now has an additional claim on debtors — this is the borrower's promise to repay the loan. The lender purchases the loan contract, treated as a promissory note. Meanwhile, when the firm disburses the loan (and hence discharges its obligation to make the money available to the borrower), it is drawing down its cash reserves or monetary deposits with its banks. As a result, one gross asset increase is matched by an equally-sized gross asset decrease, leaving net total assets unchanged.
In the second case, of a non-bank financial institution, such as a stock broker engaging in margin lending, the loan contract is the claim on the borrower that is added as an asset to the balance sheet, while the disbursement of the loan – for instance by transferring it to the client or the stock exchange to settle the margin trade conducted by its client – reduces the firm's monetary balances (likely held with a bank). As a result, total assets and total liabilities remain unchanged.
While the balance sheet total is not affected by the granting and disbursement of the loan in the case of firms other than banks, the picture looks very different in the case of a bank. While the loan contract shows up as an increase in assets with all types of corporations, in the case of a bank the disbursement of the loan ... appears as a positive entry on the liability side of the balance sheet, as opposed to being a negative entry on the asset side, as in the case of non-banks. As a result, it does not counter-balance the increased gross assets. Instead, both assets and liabilities expand. The bank's balance sheet lengthens on both sides by the amount of the loan (see the empirical evidence in Werner, 2014a and Werner, 2014c). Thus it is clear that banks conduct their accounting operations differently from others, even differently from their near-relatives, the non-bank financial institutions.
***
Surprisingly, we find that unlike the other firms whose balance sheets shrank back in Step 2, the bank's accounts seem in standstill, unchanged from Step 1. The total balance sheet remains lengthened. No balance is drawn down to make a payment to the borrower.
So how is it that the borrower feels that the bank's obligation to make funds available are being met? (If indeed they are being met). This is done through the one, small but crucial accounting change that does take place on the liability side of the bank balance sheet in Step 2: the bank reduces its ‘account payable’ item by the loan amount, acting as if the money had been disbursed to the customer, and at the same time it presents the customer with a statement that identifies this same obligation of the bank to the borrower, but now simply re-classified as a ‘customer deposit’ of the borrower with the bank.
The bank, having ‘disbursed’ the loan, remains in a position where it still owes the money. In other words, the bank does not actually make any money available to the borrower: No transfer of funds from anywhere to the customer or indeed the customer's account takes place. There is no equal reduction in the balance of another account to defray the borrower. Instead, the bank simply re-classified its liabilities, changing the ‘accounts payable’ obligation arising from the bank loan contract to another liability category called ‘customer deposits’.
While the borrower is given the impression that the bank had transferred money from its capital, reserves or other accounts to the borrower's account (as indeed major theories of banking, the financial intermediation and fractional reserve theories, erroneously claim), in reality this is not the case. Neither the bank nor the customer deposited any money, nor were any funds from anywhere outside the bank utilised to make the deposit in the borrower's account. Indeed, there was no depositing of any funds.
In Step 1 the bank had a liability — an obligation to pay someone. How can it discharge this liability? A law dictionary states:
“The most common way to be discharged from liability … is through payment.” 1
And yet, no payment takes place in Step 2 (and hence in the entire ‘lending’ process), which is why the bank's balance sheet in total remains stuck in Step 1, when all lenders still owe the money to their respective borrowers. The bank's liability is simply re-named a 'bank deposit'. However, bank deposits are defined by central banks as being part of the official money supply (as measured in such official ‘money supply’ aggregates as M1, M2, M3 or M4). This confirms that banks create money when they grant a loan: they invent a fictitious customer deposit, which the central bank and all users of our monetary system, consider to be ‘money’, indistinguishable from ‘real’ deposits not newly invented by the banks. Thus banks do not just grant credit, they create credit, and simultaneously they create money.
***
Instead of discharging their liability to pay out loans, the banks merely reclassify their liabilities originating from loan contracts from what should be an ‘accounts payable’ item to ‘customer deposit’ (in practise of course skipping Step 1 entirely and thus neglecting to record the accounts payable item). The bank issues a statement of its liability to the borrower, which records its liability as a ‘deposit’ of the borrower at the bank.
***
What enables banks to create credit and hence money is their exemption from the Client Money Rules. Thanks to this exemption they are allowed to keep customer deposits on their own balance sheet. This means that depositors who deposit their money with a bank are no longer the legal owners of this money. Instead, they are just one of the general creditors of the bank whom it owes money to. It also means that the bank is able to access the records of the customer deposits held with it and invent a new ‘customer deposit’ that had not actually been paid in, but instead is a re-classified accounts payable liability of the bank arising from a loan contract.
***
What makes banks unique and explains the combination of lending and deposit-taking under one roof is the more fundamental fact that they do not have to segregate client accounts, and thus are able to engage in an exercise of ‘re-labelling’ and mixing different liabilities, specifically by re-assigning their accounts payable liabilities incurred when entering into loan agreements, to another category of liability called ‘customer deposits’.
What distinguishes banks from non-banks is their ability to create credit and money through lending, which is accomplished by booking what actually are accounts payable liabilities as imaginary customer deposits, and this is in turn made possible by a particular regulation that renders banks unique: their exemption from the Client Money Rules. [Werner gives a concrete example on British law for banking and non-banking institutions.]
***
It would appear that those who argue that bank regulations should be liberalised in order to create a level playing field with non-banks have neglected to demand that the banks' unique exemption from the Client Money Rules – a regulation benefitting only banks – needs to be deregulated as well, so that banks must also conform to the Client Money Rules.
***
Alternatively, one could argue that it would level the playing field, if the banks' current exemption from the Client Money Rules was also granted to all other firms — in other words, if the Client Money Rules themselves were abolished. This would allow all firms to also engage in the kind of creative accounting that has become an established practise among banks. It would certainly ensure that competition between banks and non-bank financial institutions would become more meaningful, since the exemption from the Client Money Rules, together with the banks' deployment of this exemption for the purpose of re-labelling their liabilities, has given significant competitive advantages to banks over all other types of firms: banks have been able to create and allocate money – virtually the entire money supply in the economy – while no other firm is able to do the same.
***
Basel rules were doomed to failure, since they consider banks as financial intermediaries, when in actual fact they are the creators of the money supply. Since banks invent money as fictitious deposits, it can be readily shown that capital adequacy based bank regulation does not have to restrict bank activity: banks can create money and hence can arrange for money to be made available to purchase newly issued shares that increase their bank capital. In other words, banks could simply invent the money that is then used to increase their capital. This is what Barclays Bank did in 2008, in order to avoid the use of tax money to shore up the bank's capital: Barclays ‘raised’ £5.8 bn in new equity from Gulf sovereign wealth investors — by, it has transpired, lending them the money! As is explained in Werner (2014a), Barclays implemented a standard loan operation, thus inventing the £5.8 bn deposit ‘lent’ to the investor. This deposit was then used to ‘purchase’ the newly issued Barclays shares. Thus in this case the bank liability originating from the bank loan to the Gulf investor transmuted from (1) an accounts payable liability to (2) a customer deposit liability, to finally end up as (3) equity — another category on the liability side of the bank's balance sheet. Effectively, Barclays invented its own capital. This certainly was cheaper for the UK tax payer than using tax money. As publicly listed companies in general are not allowed to lend money to firms for the purpose of buying their stocks, it was not in conformity with the Companies Act 2006 (Section 678, Prohibition of assistance for acquisition of shares in public company). But regulators were willing to overlook this. As Werner (2014b) argues, using central bank or bank credit creation is in principle the most cost-effective way to clean up the banking system and ensure that bank credit growth recovers quickly. The Barclays case is however evidence that stricter capital requirements do not necessary prevent banks from expanding credit and money creation, since their creation of deposits generates more purchasing power with which increased bank capital can also be funded.
In other words, banks have been granted a loophole - not available to other businesses - to use a fiction that the banks' liabilities are really assets -which has given them a huge competitive advantage over everyone else.
No wonder banks now literally own the country ... including the entire political system.
But why don't mainstream economists understand how banks actually create money?
Economics professor Steve Keen explained last week in Forbes:
In any genuine science, empirical data like this would have forced the orthodoxy to rethink its position. But in economics, the profession has sailed on, blithely unaware of how their model of “banks as intermediaries between savers and investors” is seriously wrong, and now blinds them to the remedy for the crisis as it previously blinded them to the possibility of a crisis occurring.
A wit once defined an economist as someone who, when shown that something works in practice, replies “Ah! But does it work in theory?”
Mainstream economic models are fundamentally wrong. The theories taught in economics programs are riddled with errors. For example, they don't take into account such basic factors as private debt.
That's why the 2008 crash happened ... and that's why the economy is heading south now.
So things are going to get worse and worse until the actual manner in which money and credit are created is taken into account.
http://www.zerohedge.com/news/2016-01-15/loophole-allows-banks-–-not-other-companies-–-create-money-out-thin-air
"Panic Is Building" BofA Admits; Asks "How Bad Could This Get?"
Jan. 11, 2016
zerohedge.com
Just one month ago, Bank of America's equity strategist Savita Subramanian told Barrons to stay the course and to expect a 2,200 year end target on the S&P based on a year end 125 EPS forecast and an implied 17.6x forward multiple. Incidentally her 2015 year end S&P500 forecast was an identical 2,200.
It appears that much has changed with the market's "fundamentals" in the month that followed, because in a note released earlier today, the same Savita, when commenting on the "Worst start ever" to a new year by equity markets, is far less concerned with market upside as she is with analyzing the worst case scenarios.
Here is her take on "How bad could this get?"
The risk of a full-blown bear market remains low without a recession, which our economists continue to see as unlikely. The S&P identifies 13 bear markets since 1928, of which 10 have coincided with US recessions. The exceptions were 1961, 1966 and 1987, which (precisely because they did not occur alongside recessions) were relatively short-lived, followed by swift recoveries. In fact, the average 12-month returns from these peaks was -12%, suggesting we would only be a few percentage lower by spring. We advise against panic-selling, and still believe that we have yet to see the highs for this cycle. Our signal checklist (page 2) provides a framework for how the S&P 500 looks today relative to prior market peaks.
While Savita forgets to mention that in none of the prior historical occasions was the Fed "half-pregnant" with a $4.5 trillion balance sheet at a time of tightening conditions, she does correctly note that the current environment is hardly a "supportive backdrop for profits." Specifically she notes that the weak stock market performance comes in the context of:
slowing US and global economic growth (US 4Q GDP tracking 1%)
collapsing commodity prices (oil prices averaged -42% y/y in 4Q)
renewed fears about China (Shanghai Composite -38% since last June)
heightened geopolitical tensions (Middle East, North Korea, etc.)
the first transition to Fed policy tightening in a decade.
Her conclusion is that "these factors have created a difficult backdrop for corporate profitability, and we forecast 4Q EPS growth of -1% y/y (consensus: -4%)."
Actually, according to Factset, Q4 EPS consensus has now tumbled to -5.3% and dropping by about 1% every 2 or so weeks. More on that in a later post.
So is BofA's conclusion to ignore JPM's "sell any rally" call and BTFD? Not anymore, although while BofA does admit that "panic is building" (suggesting this "sets the stage for a rally"), it also says there is one key ingredient missing: growth.
Near-term caution is warranted, but don’t panic sell
In our framework, there are three key drivers of stock returns: valuation, sentiment and growth. But in the near term, sentiment and growth matter most.
Panic is building, most likely setting the stage for a rally, but the missing ingredient here is growth. With analysts cutting estimates at an accelerating rate, increasing China risks and no apparent floor for oil prices, we remain cautious on our near term outlook for stocks.
But not cautious enough to change the year end target of 2,200?
http://www.zerohedge.com/news/2016-01-11/panic-building-bofa-admits-asks-how-bad-could-get
Fed Starts To Walk Back Its Rate Hike. Next Step: More QE, Bigger Experiments
by John Rubino
January 14, 2016
That didn’t take long. A month after the Fed’s dreaded quarter-point interest rate hike, the markets tank and out come the talking heads to promise that whatever is bothering traders, Daddy will make it right.
Falling inflation expectations could mean policy rethink: Fed’s Bullard
(Reuters) – The continued rout on global oil markets has caused a “worrisome” drop in U.S. inflation expectations that may make further rate hikes hard to justify, St. Louis Federal Reserve President James Bullard said on Thursday.
Since the dramatic fall in oil began in 2014 Fed officials have insisted the impact on U.S. price levels would be temporary, bottoming out at some point and allowing inflation to rise to the Fed’s 2 percent target.
Bullard said he has so far been willing to look beyond a slip in expectations as likely passing. But he is now worried the plunge in oil has unmoored inflation expectations as well, a fact that would make it more difficult for the Fed to lift inflation to its 2 percent target and could force officials to rethink the four quarter-point rate hikes expected this year.
“We are 18 months into this and I am starting to wonder if my story is the right one,” Bullard said. “For me inflation expectations are a key factor and if they continue to decline I would put increasing weight on that.”
He said he still thinks that continued strong job creation would “trump” weak inflation and a slowdown in the growth of gross domestic product. The outlook for four rate hikes still seems “about right,” Bullard said.
But, coming from a Fed member who argued for an earlier rate hike and who is considered to be on the hawkish end of the spectrum, Bullard’s comments reflect the depth of concern at the Fed that it may struggle to meet its inflation goal given the state of the global economy.
To sum up, if the world stays the way it currently is, interest rates will remain zero-ish. But since the world has gotten the way it is with rates at this level, just keeping them here doesn’t seem like much of a fix. So when today’s temporary post-Bullard pop fades and the global melt-down resumes, the response will be as follows:
1) Intimate that the Fed’s balance sheet has contracted enough and maybe it’s time for it to stabilize (translation: a new but modest round of QE).
2) When that fails, promise to expand the existing QE program by an amount calculated (via focus groups of hedge fund managers?) to turn the market’s frown upside down.
3) When that fails, begin a new experiment with a catchy name like “QE for the people” or “debt jubilee” or NIRP, featuring the helicopter money that Ben Bernanke long ago promised to deploy in case of full-blown deflation — along with a nice selection of capital controls to keep unruly savers, investors and other enemies of society in line.
At which point we’ll be so deeply into uncharted territory that prediction becomes pointless, except as a form of entertainment.
http://dollarcollapse.com/monetary-policy-2/fed-starts-to-walk-back-the-rate-hike-next-step-more-qe-bigger-experiments/
What Blows Up Next? Part 2: Pension Funds With Nowhere To Hide
by John Rubino
January 12, 2016
Faced with spiking volatility in pretty much every market, it’s natural and reasonable to sell some risky assets and hide out in cash until the dust settles. So it’s not a surprise to hear that pension funds are doing just that.
Pensions, Mutual Funds Turn Back to Cash
(Wall Street Journal) – U.S. public pension funds and open-end mutual funds are keeping a greater share of their assets in cash as a result of both market jitters and demographic changes.
U.S. public pension plans and mutual funds are sheltering more of their holdings in cash than they have in years, a sign of growing stress in financial markets.
The ultradefensive stance reflects investors’ skittishness about global economic growth and uncertain prospects for further gains in assets. Pension funds have the added need to cut more checks as Americans retire in greater numbers, while mutual funds want cash to cover the risk that investors spooked by volatile markets will pull out more of their money.
Large public retirement systems and open-end U.S. mutual funds have yanked nearly $200 billion from the market since mid-2014, according to a Wall Street Journal analysis of the most recent data available from Wilshire Trust Universe Comparison Service, Morningstar Inc. and the federal government.
That leaves pension funds with the highest cash levels as a percentage of assets since 2004. For mutual funds, the percentage of assets held in cash was the highest for the end of any quarter since at least 2007.
The data run through Sept. 30, but many money managers say they remain very conservative. Pension consultants say some fund managers are considering socking even more of their assets into cash as they wait for the markets to calm down.
“Some clients are asking us, ‘Would we be crazy to put 10% or 15% of our assets into cash?’,” said Michael A. Moran, a pension strategist at Goldman Sachs Asset Management.
Unfortunately for pension funds, hiding out in cash doesn’t work the same way as for you and me. Most of these funds (set up to give teachers, firefighters and other good people a decent retirement) are required to generate returns of 8% to avoid stiffing their beneficiaries. And since cash earns zero these days, every dollar invested this way drops these (in many cases already woefully undercapitalized) funds deeper into a hole from which most will never escape.
Just to be clear, pension funds — the last remaining link to middle class money for millions of Americans — aren’t to blame for any of this. The culprits are the mayors and governors who bought off their public sector unions with promises that would never be kept, and a federal government that’s papering over its own malfeasance by lowering interest rates to levels that make it impossible for anyone to generate a reasonable low-risk return.
But however they got here, it’s now all but certain that pension funds will soon start blowing up, either defaulting on promised benefit or bond payments, leveraging themselves for one last roll of the dice, or demanding new taxes that cause local political chaos.
When they do, they’ll add their own brand of crazy to the mix of imploding junk bonds, derivatives and equities that will make 2016 such a fun year to watch from a safe distance.
For a glimpse of the future for dozens of state and local pension plans, pay a quick visit to Illinois:
Record budget impasse belies fix to pension disaster in Illinois
(Chicago Tribune) – As 2015 draws to a close, Illinois marks half a year without a budget. No spending plan has driven up borrowing costs, sunk its credit rating, and perhaps worst of all, exacerbated the state’s biggest problem: its underfunded pensions.
Home to the least-funded state retirement system in the nation, Illinois has $111 billion of pension debt, which breaks down to more than $8,000 per resident. Partisan gridlock has produced the longest budget impasse in Illinois history. The stalemate has not only weakened state finances, it has kept lawmakers from finding a fix for those mounting liabilities.
Illinois’s fiscal health will deteriorate further without a budget, hindering its ability to mend its pension system. Moody’s Investors Service dropped Illinois, already the worst- rated state, to the lowest investment-grade tier in October as the budget stalemate dragged on. Last month, Moody’s warned that pensions are Illinois’s “greatest challenge.”
It’s been seven months since the Illinois Supreme Court rejected the state’s solution. Justices threw out the 2013 restructuring that took six attempts over 16 months to pass, despite one-party rule at the time. The measure was projected to save $145 billion over 30 years by limiting cost-of-living adjustments and raising the retirement age.
Illinois enters 2016 snarled in partisan bickering as Gov. Bruce Rauner, the state’s first Republican chief executive in 12 years, and the Democrat-controlled legislature can’t agree on annual appropriations, much less an overhaul of a retirement system that must withstand an inevitable legal challenge. The state constitution bans reducing worker retirement benefits.
In July, Rauner laid out a plan to create a tiered system to cut retirement liabilities. At the time, he said it would save taxpayers billions of dollars. The proposal, which included a measure to allow municipalities to file for bankruptcy protection, was never introduced, according to Catherine Kelly, his spokeswoman.
Illinois is set to pay about $7.5 billion to pensions this fiscal year, and another $7.8 billion in the year that starts July 1, according to the Civic Federation, citing preliminary estimates by the retirements systems.
Even with the record budget impasse, about one of every $5 from the state’s general fund coffers is going toward pensions, according to a Civic Federation report that cites estimates from Illinois Senate Democrats published on Aug. 13. The state’s four plans are only 42 percent funded based on the market value of assets, according to the Commission on Government Forecasting and Accountability. That compares to 60 percent a decade earlier.
The lack of a budget forced the state comptroller to delay a $560 million November payment to the state retirement system. Illinois’s unpaid bills totaled $7.6 billion as of Dec. 18, according to that office. The November retirement payment will be paid in the spring when the state has more revenue from income tax collections, according to the comptroller’s staff.
While Comptroller Leslie Geissler Munger has said bond payments are prioritized, the lack of budget has shaken some investors’ confidence. Illinois hasn’t sold bonds since April 2014, a record borrowing drought. The spread on its existing debt has widened. Investors demand 1.8 percentage points of extra yield to own 30-year Illinois bonds, the most among the 20 states tracked by Bloomberg. When the spread climbs, that’s reflecting that investors think the problem is getting worse, said Richard Ciccarone, Chicago-based chief executive officer of Merritt Research Services.
“What’s the root cause of why we’re in the problem we’re in?” Ciccarone said. “It’s down to the pensions.”
Illinois is like a patient in the emergency room, said Paul Mansour at Conning, which oversees $11 billion of munis, including Illinois securities. The budget stalemate is the crisis at hand, and the unfunded pension liabilities is the chronic disease that’s only getting worse. The budget standoff is hurting future negotiations on pension changes, he said.
If this sounds a little like what Greece went through in 2015, that’s because it is. Both Illinois and Greece are failed states destined to default on their bonds unless bailed out by the central government. And since bail-outs are unpopular, it takes a crisis to focus enough minds to get one done.
In Illinois’ case the crisis will take the form of a bond default by Chicago or one of its sub-units, which sends the muni bond market into turmoil — just as several other markets (energy junk bonds, sub-prime auto loans, emerging market US$ loans come to mind) are blowing up.
And this is just the beginning. The US has plenty of other Illinois-level pension crises waiting to happen. So depending on the form they take (defaults or bail-outs or some combination there-of) pensions will spice things up in the coming year.
http://dollarcollapse.com/pension-funds/what-blows-up-next-pension-funds-with-nowhere-to-hide/
Treasury Report Shows Biggest Threat to U.S. Is on Wall Street
Corporate Debt Has Ballooned in the U.S. Since the Last Crisis
By Pam Martens and Russ Martens
December 16, 2015
If the U.S. government issued a warning yesterday that there was a credible threat of a new terrorist attack from a foreign terrorist, we can guarantee you that it would have made front page headlines. What the U.S. government did instead yesterday was to issue a formal warning that the prospects for a new financial crisis have grown, and, in one area, are at an “historically elevated level.”
Since the financial crisis of 2007-2009 did more economic damage to the U.S. than all terrorist attacks combined and will have a devastating impact on the standard of living of the next generation, one would think this new financial warning would have been worthy of a mention on the front pages of mainstream newspapers. And yet, we could find no mention in the New York Times, Los Angeles Times, Chicago Tribune, Washington Post, etc. (To their credit, the Wall Street Journal and Reuters did write about the findings.)
What might explain the hesitation to carry the story by the major dailies is the contradictory nature of the material released by the U.S. Treasury’s Office of Financial Research (OFR). That’s the body created under the Dodd-Frank financial reform legislation of 2010 to keep the Financial Stability Oversight Council (also created under Dodd-Frank) informed on a timely basis to rising threats to financial stability in the U.S.
The OFR report listed a litany of hair-raising threats to financial stability but then bizarrely concluded: “Overall, threats to U.S. financial stability remain moderate….”
Rational readers of the report must conclude that when financial data turns unprecedented and “historic” in a significantly negative way, it can’t be a “moderate” concern. For example, the report advises the following:
“Signs of excess in U.S. nonfinancial corporate credit markets have persisted since our last report. Rapid debt growth continued, and the ratio of nonfinancial business debt to GDP reached a new post-crisis high. Balance sheet leverage, particularly for highly-rated firms, has continued to rise as new debt continued to increase and earnings fell. The rise in leverage is most pronounced among more vulnerable companies — firms with already elevated debt levels or weak repayment capacity.”
Corporate debt to GDP reaching a “new post-crisis high” in a vulnerable economy does not sound like a “moderate” threat to us. Our major trading partners (Canada and China) are experiencing a significant slowdown, the rise in the U.S. dollar is impeding our ability to export our way out of subpar growth, and the Fed is signaling that it plans to raise rates. (We’ll know the outcome of that Fed “signaling” at 2 p.m. today.)
On the matter of how a Fed rate hike might add to financial instability, the OFR report notes the following:
“Higher base interest rates and spreads induced by monetary tightening may create refinancing risks, expose weaknesses in heavily leveraged entities, and potentially precipitate a broader default cycle. The fact that U.S. nonfinancial business debt has expanded so rapidly since the financial crisis suggests that even a modest default rate could lead to larger absolute losses than in previous default cycles.”
Nothing in the above statement sounds like a “moderate” level of risk either. Less than a decade ago, the U.S. went through the worst economic disaster since the Great Depression. To keep the country from sinking into a full blown depression, the government engaged in both fiscal and monetary spending which has ballooned the national debt to $18.8 trillion and the Federal Reserve’s balance sheet to $4.5 trillion – two more unprecedented firsts in not a good way.
The public thought that the irresponsible debt binge that led to the last crisis would be followed by a debt liquidation cycle – creating the foundation for a stronger, more resilient U.S. economy. So what happened to the debt liquidation cycle? How did we end up in a situation where “even a modest default rate could lead to larger absolute losses than in previous default cycles.”
We have a growing suspicion that the bureaucratic juggernaut that Congress has built around Wall Street and its financial appendages is providing the illusion of monitoring risk while the actual risk is spiraling, once again, out of control. The Federal agencies monitoring Wall Street banks are as follows: the Federal Reserve Board of Governors, the Office of the Comptroller of the Currency, the Securities and Exchange Commission, the Commodity Futures Trading Commission, the U.S. Treasury and its OFR, the Financial Stability Oversight Council, the Federal Deposit Insurance Corporation, and that list doesn’t even include the industry’s self-regulators like stock exchanges and FINRA.
And yet, with all of those monitors and tens of billions of dollars in costs for staff and studies, yesterday OFR said in its press release announcing the new report that:
“Financial activity and risks have migrated outside the regulatory perimeter, market liquidity appears to have become more fragile in recent years, and interconnections among financial firms and markets are evolving in ways not fully understood.”
“Not fully understood?” Americans should be protesting in the streets over that revelation. It is simply unacceptable for our government to have spent seven years since the epic financial collapse and have nothing better to tell taxpayers than it does not fully understand how our financial system works. Clearly, if it can’t be understood, it must be simplified. As we have warned for years, the Glass-Steagall Act is the only reliable means of ensuring a stable financial system. An ever growing number of regulators have been scratching their heads and staring into the abyss ever since Glass-Steagall was repealed in 1999.
To illustrate just how insane the new Frankenbank Wall Street model is, the OFR report explains how the effort to bring transparency and financial stability to the hundreds of trillions of dollars of derivatives on the books of the FDIC-insured, deposit taking banks has worked out. The plan was to create central counterparties (CCPs) that would clear derivatives transactions and replace the opaque, over-the-counter process that was in place pre-crisis. The new plan went like this according to OFR:
“CCPs can reduce a firm’s exposure to individual counterparties and can mitigate overall credit risk through multilateral trade netting and imposing risk controls on clearing members.”
What has happened instead is that the Financial Stability Oversight Council has now designated five CCPs as themselves “systemically important” because, says the OFR: “The failure of a CCP could impose large losses on major financial firms and disrupt the operation of other parts of the financial system. The main risk to the solvency of a CCP is the failure of its members to meet payment obligations on the transactions they clear through the CCP.”
We seem to have traveled in a circle for seven years, arrived back at the same point we found ourselves at on September 15, 2008, and have nothing to show for it but a sprawling octopus of financial industry watchers – not watchdogs, mind you, just watchers.
http://wallstreetonparade.com/2015/12/treasury-report-shows-biggest-threat-to-u-s-is-on-wall-street/
U.S. Banks Have 247 Trillion Dollars Of Exposure To Derivatives
By Michael Snyder
December 29th, 2015
Did you know that there are 5 “too big to fail” banks in the United States that each have exposure to derivatives contracts that is in excess of 30 trillion dollars? Overall, the biggest U.S. banks collectively have more than 247 trillion dollars of exposure to derivatives contracts. That is an amount of money that is more than 13 times the size of the U.S. national debt, and it is a ticking time bomb that could set off financial Armageddon at any moment.
Globally, the notional value of all outstanding derivatives contracts is a staggering 552.9 trillion dollars according to the Bank for International Settlements. The bankers assure us that these financial instruments are far less risky than they sound, and that they have spread the risk around enough so that there is no way they could bring the entire system down. But that is the thing about risk – you can try to spread it around as many ways as you can, but you can never eliminate it. And when this derivatives bubble finally implodes, there won’t be enough money on the entire planet to fix it.
A lot of readers may be tempted to quit reading right now, because “derivatives” is a term that sounds quite complicated. And yes, the details of these arrangements can be immensely complicated, but the concept is quite simple. Here is a good definition of “derivatives” that comes from Investopedia…
A derivative is a security with a price that is dependent upon or derived from one or more underlying assets. The derivative itself is a contract between two or more parties based upon the asset or assets. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes.
I like to refer to the derivatives marketplace as a form of “legalized gambling”. Those that are engaged in derivatives trading are simply betting that something either will or will not happen in the future. Derivatives played a critical role in the financial crisis of 2008, and I am fully convinced that they will take on a starring role in this new financial crisis.
And I am certainly not the only one that is concerned about the potentially destructive nature of these financial instruments. In a letter that he once wrote to shareholders of Berkshire Hathaway, Warren Buffett referred to derivatives as “financial weapons of mass destruction”…
The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts. In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.
Since the last financial crisis, the big banks in this country have become even more reckless. And that is a huge problem, because our economy is even more dependent on them than we were the last time around. At this point, the four largest banks in the U.S. are approximately 40 percent larger than they were back in 2008. The five largest banks account for approximately 42 percent of all loans in this country, and the six largest banks account for approximately 67 percent of all assets in our financial system.
So the problem of “too big to fail” is now bigger than ever.
If those banks go under, we are all in for a world of hurt.
Yesterday, I wrote about how the Federal Reserve has implemented new rules that would limit the ability of the Fed to loan money to these big banks during the next crisis. So if the survival of these big banks is threatened by a derivatives crisis, the money to bail them out would probably have to come from somewhere else.
In such a scenario, could we see European-style “bail-ins” in this country?
Ellen Brown, one of the most fierce critics of our current financial system and the author of Web of Debt, seems to think so…
Dodd-Frank states in its preamble that it will “protect the American taxpayer by ending bailouts.” But it does this under Title II by imposing the losses of insolvent financial companies on their common and preferred stockholders, debtholders, and other unsecured creditors. That includes depositors, the largest class of unsecured creditor of any bank.
Title II is aimed at “ensuring that payout to claimants is at least as much as the claimants would have received under bankruptcy liquidation.” But here’s the catch: under both the Dodd Frank Act and the 2005 Bankruptcy Act, derivative claims have super-priority over all other claims, secured and unsecured, insured and uninsured.
The over-the-counter (OTC) derivative market (the largest market for derivatives) is made up of banks and other highly sophisticated players such as hedge funds. OTC derivatives are the bets of these financial players against each other. Derivative claims are considered “secured” because collateral is posted by the parties.
For some inexplicable reason, the hard-earned money you deposit in the bank is not considered “security” or “collateral.” It is just a loan to the bank, and you must stand in line along with the other creditors in hopes of getting it back.
As I mentioned yesterday, the FDIC guarantees the safety of deposits in member banks up to a certain amount. But as Brown has pointed out, the FDIC only has somewhere around 70 billion dollars sitting around to cover bank failures.
If hundreds of billions or even trillions of dollars are ultimately needed to bail out the banking system, where is that money going to come from?
It would be difficult to overstate the threat that derivatives pose to our “too big to fail” banks. The following numbers come directly from the OCC’s most recent quarterly report (see Table 2), and they reveal a recklessness that is on a level that is difficult to put into words…
Citigroup
Total Assets: $1,808,356,000,000 (more than 1.8 trillion dollars)
Total Exposure To Derivatives: $53,042,993,000,000 (more than 53 trillion dollars)
JPMorgan Chase
Total Assets: $2,417,121,000,000 (about 2.4 trillion dollars)
Total Exposure To Derivatives: $51,352,846,000,000 (more than 51 trillion dollars)
Goldman Sachs
Total Assets: $880,607,000,000 (less than a trillion dollars)
Total Exposure To Derivatives: $51,148,095,000,000 (more than 51 trillion dollars)
Bank Of America
Total Assets: $2,154,342,000,000 (a little bit more than 2.1 trillion dollars)
Total Exposure To Derivatives: $45,243,755,000,000 (more than 45 trillion dollars)
Morgan Stanley
Total Assets: $834,113,000,000 (less than a trillion dollars)
Total Exposure To Derivatives: $31,054,323,000,000 (more than 31 trillion dollars)
Wells Fargo
Total Assets: $1,751,265,000,000 (more than 1.7 trillion dollars)
Total Exposure To Derivatives: $6,074,262,000,000 (more than 6 trillion dollars)
As the “real economy” crumbles, major hedge funds continue to drop like flies, and we head into a new recession, there seems to very little alarm among the general population about what is happening.
The mainstream media is assuring us that everything is under control, and they are running front page headlines such as this one during the holiday season: “Kylie Jenner shows off her red-hot, new tattoo“.
But underneath the surface, trouble is brewing.
A new financial crisis has already begun, and it is going to intensify as we head into 2016.
And as this new crisis unfolds, one word that you are going to want to listen for is “derivatives”, because they are going to play a major role in the “financial Armageddon” that is rapidly approaching.
http://theeconomiccollapseblog.com/archives/financial-armageddon-approaches-u-s-banks-have-247-trillion-dollars-of-exposure-to-derivatives
Transcript of Senator Bernie Sanders’ speech on reforming Wall Street, as delivered, at Town Hall, 123 West 43rd Street, New York City on January 5, 2016, 2 p.m.
The American people are catching on. They understand that there is something profoundly wrong when, in our country today, the top one-tenth of 1 percent owns almost as much wealth as the bottom 90 percent. They understand that something is profoundly wrong when the 20 richest people in our country own more wealth than the bottom half of the American population — 150 million people. They know that the system is rigged when the average person is working longer hours for lower wages, and yet 58 percent of all new income generated is going to the top 1 percent.
Executives on Wall Street have extraordinary power over the economic and political life of our country. As most people know, in the 1990s and later, the financial interests spent billions of dollars on campaign contributions to force through Congress the deregulation of Wall Street, the repeal of the Glass-Steagall Act and the weakening of consumer protection laws all across our country.
Wall Street spent this money in order to get the government off their backs and to show the American people what they could do with this new-won freedom from regulation. Well, they sure showed the American people. In 2008, the greed, recklessness and illegal behavior on Wall Street nearly destroyed the American and global economy.
Millions of Americans lost their jobs, they lost their homes and they lost their life savings.
While Wall Street received the largest taxpayer bailout in the history of the world with no strings attached, the American middle class continues to disappear, poverty is increasing and the gap between the very rich and everyone else continues to grow wider. And Wall Street executives still receive huge compensation packages as if the financial crisis they created never happened.
Greed, fraud, dishonesty and arrogance, these are some of the words that best describe the reality of Wall Street today.
So, to those on Wall Street who may be listening to my remarks, and I’m sure there are many of them, let me be very clear. Greed is not good. In fact, the greed of Wall Street and corporate America is destroying the very fabric of our nation. And, here is a New Year’s Resolution that I will keep if elected president. And that is, if Wall Street does not end its greed, we will end it for them.
We will no longer tolerate an economy and a political system that has been rigged by Wall Street to benefit the wealthiest Americans in this country at the expense of everyone else.
While President Obama deserves credit for improving this economy after the Wall Street crash, the reality is that a lot of unfinished business remains to be done.
Our goal must be to create a financial system and an economy that works for all of our people, not just a handful of billionaires. That means we have got to end, once and for all, the scheme that is nothing more than a free insurance policy for Wall Street, the policy of “too big to fail.”
We need a banking system that is part of the productive economy – making loans at affordable rates to small and medium-sized businesses so that we can create decent-paying jobs in our country. Wall Street cannot continue to be an island unto itself, gambling trillions in risky financial instruments, making huge profits and assured that, if their schemes fail, the taxpayers will be there to bail them out.
In 2008, the taxpayers of this country bailed out Wall Street because we were told that they were “too big to fail.” Yet, today, today, three out of the four largest financial institutions — JP Morgan Chase, Bank of America and Wells Fargo — are nearly 80 percent bigger than before we bailed them out because they were too-big-to-fail. Incredibly, the six largest banks in this country issue more than two-thirds of all credit cards and more than 35 percent of all mortgages. They control more than 95 percent of all financial derivatives and hold more than 40 percent of all bank deposits. Their assets today are equivalent to nearly 60 percent of the GDP of the United States of America. Enough is enough.
If a bank is too big to fail it is too big to exist. When it comes to Wall Street reform that must be our bottom line. This is true not just from a risk perspective and the fear of another bailout. It is also true from the reality that a handful of huge financial institutions simply have too much economic and political power over this country.
If Teddy Roosevelt, the Republican trust-buster, were alive today, he would say “break them up.” And he would be right. That’s exactly what we have to do and here’s how I will accomplish that.
Within the first 100 days of my administration, I will require the Secretary of the Treasury Department to establish a “too-big-to-fail” list of commercial banks, shadow banks and insurance companies whose failure would pose a catastrophic risk to the United States economy without a taxpayer bailout.
Within one year, my administration will break these institutions up so that they no longer pose a grave threat to the economy. And together we will reinstate a 21st Century Glass-Steagall Act to clearly separate commercial banking, investment banking and insurance services. Let’s be clear: this legislation, introduced by my colleague Senator Elizabeth Warren, her legislation aims at the heart of the shadow banking system. In my view, Senator Warren, is right. Dodd-Frank should have broken up Citigroup and other “too-big-to-fail” banks into pieces. And that is exactly what we need to do. And that is what I commit to do as president of the United States.
Now, my opponent, Secretary Clinton says that Glass-Steagall would not have prevented the financial crisis because shadow banks like AIG and Lehman Brothers, not big commercial banks, were the real culprits.
Secretary Clinton is wrong.
Shadow banks did gamble recklessly, but where did that money come from? It came from the federally-insured bank deposits of big commercial banks – something that would have been banned under the Glass-Steagall Act.
Let us not forget: President Franklin Roosevelt signed this bill into law precisely to prevent Wall Street speculators from causing another Great Depression. And, it worked for more than five decades until Wall Street watered it down under President Reagan and killed it under President Clinton.
And, let’s not kid ourselves. The Federal Reserve and the Treasury Department didn’t just bail out shadow banks. As a result of an amendment that I offered to audit the emergency lending activities of the Federal Reserve during the financial crisis, we learned that the Fed provided more than $16 trillion in short-term, low-interest loans to every major financial institution in this country including Citigroup, JPMorgan Chase, Bank of America, Wells Fargo, not to mention large corporations, foreign banks, and foreign central banks throughout the world.
Secretary Clinton says we just need to impose a few more fees and regulations on the financial industry. I disagree.
As former Secretary of Labor Robert Reich has said and I quote: “Giant Wall Street banks continue to threaten the well being of millions of Americans, but what to do? Bernie Sanders says break them up and resurrect the Glass-Steagall Act that once separated investment from commercial banking. Hillary Clinton says charge them a bit more and oversee them more carefully … Hillary Clinton’s proposals would only invite more dilution and finagle. The only way to contain the Street’s excess is with reforms so big, bold, and public they can’t be watered down – busting up the biggest banks and resurrecting Glass-Steagall.”
Secretary Reich is right. Real Wall Street reform means breaking up big banks and re-establishing firewalls that separates risk taking from traditional banking.
My opponent says that, as a senator, she told bankers to “cut it out” and end their destructive behavior. But, in my view, establishment politicians are the ones who need to “cut it out.” The reality is that Congress does not regulate Wall Street…(crowd interrupts and chants “Wall Street regulates Congress”.)
You got it! And you know what, as President we’re gonna end that reality.
It is no secret that millions of Americans have become disillusioned and alienated from our political process. They don’t vote. They don’t believe much of what comes out of Washington. They don’t think that there is anyone there representing their interests. In my view, one of the reasons for the deep disillusionment that is so widespread is the understanding that our criminal justice system is broken and grossly unfair. It is broken, unfair and we do not have equal justice under the law. The average American sees kids being arrested and sometimes even jailed for possessing marijuana or other minor crimes. But when it comes to Wall Street executives, some of the wealthiest and most powerful people in this country, whose illegal behavior caused pain and suffering for millions of Americans – somehow nothing happens to them.
Their illegal behavior destroys our economy, millions lose their jobs, their homes, their life savings, but for the CEOs of Wall Street, no police record, no jail time, no justice.
We live in a country today that has an economy that is rigged, a campaign finance system which is corrupt and a criminal justice system which, too often, does not dispense justice.
Not one major Wall Street executive has ever been prosecuted for causing the near collapse of our entire economy. That will change under my administration. “Equal Justice Under Law” will not just be words engraved on the entrance of the Supreme Court. It will be the standard that applies to Wall Street and all Americans.
It seems like almost every few weeks we read about one giant financial institution after another being fined or reaching settlements for their reckless, unfair and deceptive activities.
Some people believe that this is an aberration: that we have an honest financial system in which, every now and then, major financial institutions do something wrong and get caught. In my view, the evidence suggests that would be an incorrect analysis.
The reality is that fraud is the business model of Wall Street. It is not the exception to the rule. It is the rule. And in a very weak regulatory climate the likelihood is that Wall Street gets away with a lot more illegal behavior than we know of.
How many times have we heard the myth that what Wall Street did may have been wrong but it wasn’t illegal?
Let me help shatter that myth today.
Since 2009, major financial institutions in this country have been fined $204 billion. $204 billion. And that once again takes place in a weak regulatory climate.
Here are just a few examples, a few examples, of when major banks were caught doing illegal activity.
In August 2014, Bank of America settled a case with the Department of Justice for more than $16 billion on charges that the bank misled investors about the riskiness of mortgage-backed securities it sold in the run-up to the crisis.
In November of 2013, JP Morgan settled a case for $13 billion with the Department of Justice and the Federal Housing Finance Agency over charges that the bank knowingly sold securities made up of low-quality mortgages to Fannie Mae and Freddie Mac.
In June of 2014, BNP Paribas was sentenced to five years’ probation and was ordered to pay $8.9 billion in penalties by a U.S. District Judge in Manhattan after the bank pled guilty to charges of violating sanctions by conducting business in Sudan, Iran and Cuba.
Let me, in addition, read you a few headlines and you tell me how it could possibly make sense that not one executive on Wall Street was prosecuted for fraud.
CNN Headline, May 20, 2015: “Five big banks pay $5.4 billion for rigging currencies.” Those banks include JPMorgan Chase and Citigroup.
Headline from the International Business Times (February 24, 2015): “Big Banks Under Investigation For Allegedly Fixing Precious Metals Prices.” The Banks under investigation included Goldman Sachs and JPMorgan Chase.
Headline from The Real News Network (November 26, 2013): “Documents in JPMorgan settlement reveal how every large bank in the U.S. has committed mortgage fraud.”
Headline from The Washington Post (March 14, 2014): “In lawsuit, FDIC accuses 16 big banks of fraud, conspiracy.” Banks included Bank of America, Citigroup and JPMorgan Chase.
Headline from the Guardian (April 2, 2011): “How a big U.S. bank laundered billions from Mexico’s murderous drug gangs.” This article talks about how Wachovia (which was acquired by Wells Fargo) aided Mexican drug cartels in transferring billions of dollars in illegal drug money. And this is what the federal prosecutor said about this and he said and I quote: “Wachovia’s blatant disregard for our banking laws gave international cocaine cartels a virtual carte blanche to finance their operations.”
Yet, the total fine for this offense was less than 2 percent of the bank’s $12 billion profit for 2009 and no one went to jail. No one went to jail.
And, if that’s not bad enough, here’s another one.
Headline: The Wall Street Journal, February 9, 2011: “J.P. Morgan Apologizes for Military Foreclosures.” Here is a case where JPMorgan Chase, the largest bank in America, wrecked the finances of 4,000 military families in violation of the Civil Service Members Relief Act, yet no one went to jail.
And, when I say that the business model of Wall Street is fraud that is not just Bernie Sanders talking. That is what financial executives themselves told the University of Notre Dame in a study on the ethics of the financial services industry last year.
According to this study, listen to this, 51 percent of Wall Street executives making more than $500,000 a year found it likely that their competitors have engaged in unethical or illegal activity in order to gain an edge in the market.
More than one-third of financial executives have either witnessed or have firsthand knowledge of wrongdoing in the workplace.
Nearly one in five financial service professionals believe they must engage in illegal or unethical activity to be successful.
Twenty-five percent of financial executives have signed or been asked to sign a confidentiality agreement that would prohibit reporting illegal or unethical activities to the authorities.
Here is what one banker from Barclays said in 2010, when he was caught trying to price-fix the $5 trillion-per-day currency market: “If you ain’t cheating, you ain’t trying.”
Here’s what an analyst from Standard & Poors said in 2008, and I quote: “Let’s hope we are all wealthy and retired by the time this house of cards falters.”
This country can no longer afford to tolerate the culture of fraud and corruption on Wall Street.
Under my administration, Wall Street CEOs will no longer receive a get-out-of jail free card. Not only will big banks not be too-big-to-fail, big bankers will not be too big to jail.
As president, I will nominate and appoint people with a track record of standing up to power, rather than those who have made millions defending Wall Street CEOs. Goldman Sachs and other Wall Street banks will not be represented in my administration.
And, if we are serious about reforming our financial system, we have got to establish a tax on Wall Street speculators. We have got to discourage reckless gambling on Wall Street and encourage productive investments in the job-creating economy.
We will use the revenue from this tax to make public colleges and universities tuition free. As all of you remember, during the financial crisis when Wall Street’s greed and illegal behavior nearly destroyed our economy, the middle class of this country bailed out Wall Street. Now, it’s Wall Street’s turn to help the middle class of this country.
We cannot have a safe and sound financial system if we cannot trust the credit agencies to accurately rate financial products. And, the only way we can restore that trust is to make sure credit rating agencies do not make a profit from Wall Street.
The truth is that investors would not have bought the risky mortgage backed derivatives that led to the Great Recession if credit agencies did not give these worthless financial products triple-A ratings – ratings they knew were bogus.
And, the reason these risky financial schemes were given such favorable ratings is simple. Wall Street paid for them.
Under my administration, we will turn for-profit credit rating agencies into non-profit institutions, independent from Wall Street. No longer will Wall Street be able to pick and choose which credit agency will rate their products.
If we are going to create a financial system in this country that works for all Americans, we have got to stop financial institutions from ripping off the American people by charging sky-high interest rates and outrageous fees.
In my view, it is unacceptable that Americans are paying $4 or $5 in fees every time they go to an ATM.
It is wrong that millions of Americans are paying credit card interest rates of 20 or 30 percent.
The Bible has a term for this practice. It’s called usury. And in “The Divine Comedy,” Dante reserved a special place in Hell for those who charged people usurious interest rates.
Well today, we don’t need the hellfire and the pitch forks, we don’t need the rivers of boiling blood, but we do need a national usury law.
In 1980, Congress passed legislation to require credit unions to cap interest rates on their loans at no more than 15 percent. And, that law has worked well. Unlike big banks, credit unions did not receive a huge bailout from the taxpayers of this country. It is time to extend this cap to every lender in America.
We must also cap ATM fees at $2.00. People should not have to pay a 10 percent fee for withdrawing $40 of their own money out of an ATM.
Huge banks need to stop acting like loan sharks and start acting like responsible lenders.
We also need to give low-income Americans affordable banking options.
The reality is – this is quite unbelievable but true – that millions of low-income Americans live in communities where there are no normal banking services. Today, if you live in a low-income community and you need to cash a check or get a loan to pay for a car repair or a medical emergency, where do you go?
You go to a payday lender who could charge an interest rate of over 300 percent and trap you into a vicious cycle of debt. That has got to end.
We need to stop payday lenders from ripping off some of the most vulnerable people in this country. Post offices exist in almost every community in our country. One important way to provide decent banking opportunities for low income communities is to allow the United States Postal Service to engage in basic banking services, and that’s what I will fight for.
Further, we need to structurally reform the Federal Reserve to make it a more democratic institution responsive to the needs of ordinary Americans, not just billionaires on Wall Street.
When Wall Street was on the verge of collapse, the Federal Reserve acted with a fierce sense of urgency to save the financial system. We need the Fed to act with that same boldness today, that fierce sense of urgency, to combat unemployment and low wages.
We need to structurally reform the Federal Reserve to make it a more democratic institution responsive to the needs of ordinary Americans, not just Wall Street.
It is unacceptable that the Federal Reserve has been hijacked by the very bankers it is in charge of regulating. The American people, I believe, would be shocked to know that Jamie Dimon, the CEO of JP Morgan Chase, served on the board of the New York Fed at the same time that his bank received a $391 billion bailout from the Federal Reserve. That is a clear conflict of interest that I will ban as president.
As President I will not allow the foxes to be guarding the henhouse at the Fed. Under my administration, banking industry executives will no longer be able to serve on the Fed’s boards and handpick its members and staff.
Further, the Fed should stop paying financial institutions interest to keep money out of the economy and parked at the Fed. Incredibly, the excess reserves of financial institutions that are sitting in the Federal Reserve have grown from less than $2 billion in 2008 to $2.4 trillion today. That is absurd.
Instead of paying interest on these reserves, the Fed should charge them a fee that could be used to create jobs all over America.
Let me tell you something that no other candidate will tell you. No president, not Bernie Sanders or anyone else, can effectively address the economic crises facing the working families of this country alone. No president can do it alone. The truth is – and it’s important that every American understand this – the truth is that Wall Street, corporate America, the corporate media and wealthy campaign donors are just too powerful.
What this campaign is about is building a political movement which revitalizes American democracy, which brings millions of people together – black and white, Latino, Asian-American, Native American – young and old, men and women, gay and straight, native born and immigrant, people of all religions.
Yes, Wall Street does have enormous economic and political power. Yes, Wall Street makes huge campaign contributions, they have thousands of lobbyists and they provide very generous speaking fees to those who go before them.
Yes, Wall Street has an endless supply of money. But we have something they don’t have. And that is that when millions of working families stand together, demanding fundamental changes in our financial system, we have the power to bring about that change.
Yes, we can make our economy work for all Americans, not just a handful of wealthy speculators. And, now more than ever, that is exactly what we must do.
And so my message to you today is simple and straightforward: If elected president, I will rein in Wall Street so they cannot crash our economy again.
Will the folks on Wall Street like me? No. Will they begin to play by the rules if I am president? You better believe it!
Thank you all for being here and I look forward to working with the most powerful force in our great nation, not the Barons of Wall Street but the people of our government who are going to fight to create a government that works for us all and not just the one percent. Thank you all very much.
http://wallstreetonparade.com/2016/01/key-segments-of-bernie-sanders-speech-on-wall-street-reform-disappear/
The End of the Monetary Illusion Magnifies Shocks for Markets
Simon Kennedy
January 8, 2016
Central bankers are no longer the circuit breakers for financial markets.Monetary-policy makers, market saviors the past decade through the promise of interest-rate reductions or asset purchases, now lack the space to cut further -- if at all -- or buy more.
Even those willing to intensify their efforts increasingly doubt the potency of such policies.That’s leaving investors having to cope alone with shocks such as this week’s rout in China or when economic data disappoint, magnifying the impact of such events.
“The monetary illusion is drawing to a close,” said Didier Saint Georges, a member of the investment committee at Carmignac Gestion SA, an asset-management company. “With central banks becoming increasingly restricted in their stimulus policies, 2016 is likely to be the year when the markets awaken to economic reality.”
Even against the backdrop of this week’s market losses, Federal Reserve officials signaled their intention to keep raising interest rates this year. Those at the European Central Bank and Bank of Japan ended last year playing down suggestions they will ultimately need to intensify economic-aid programs.
They have only themselves to blame for becoming agents of volatility, according to Christopher Walen, senior managing director at Kroll Bond Rating Agency Inc.
He told Bloomberg Television this week that officials’ willingness to keep interest rates near zero and repeatedly buy bonds and other assets meant they became “way too involved in the global economy” and should have left more of the lifting work to governments.
The handover to looser fiscal policy now needs to happen if economic growth and inflation are to get the spur they need, said Martin Malone, global macro policy strategist at London-based brokerage Mint Partners.
“Major economies have exhausted monetary and foreign-exchange policies,” he said. “Government action must take over from central-bank policies, triggering more confident private-sector investment and spending.”
The influence of central bankers was underscored by a report this week from currency strategists at HSBC Holdings Plc, which calculated foreign-exchange markets are more sensitive to interest-rate decision-making than at any time in the last 15 years.
“FX markets are likely to remain hypersensitive to rate expectations until we are past the current era of extremely accommodative monetary policy,” the strategists led by David Bloom wrote.
Even if more stimulus does end up being delivered by the ECB or BOJ, China’s increased willingness to devalue the yuan will blunt the effect of it by limiting declines in their currencies and pushing up bond yields as money exits China, according to George Saravelos, a strategist at Deutsche Bank AG in London.
“All of these natural market forces that have been suppressed and overwhelmed by money printing by developed-market central banks will likely assert themselves this year,” said Stephen Jen, founder of London-based hedge fund SLJ Macro Partners LLP. “My guess is that this will not be a tranquil year.”
http://www.bloomberg.com/news/articles/2016-01-08/the-end-of-the-monetary-illusion-magnifies-shocks-for-markets
Perfect Storm!
by John Rubino
January 7, 2016
One of the (many) fascinating things about this latest global financial crisis is that there’s no single catalyst. Unlike 2008 when the carnage could be traced back to US subprime housing, or 2000 when tech stocks crashed and pulled down everything else, this time around a whole bunch of seemingly-unrelated things are unraveling all at once.
China’s malinvestment binge is crashing global commodities, an overvalued dollar is crushing emerging markets (most recently forcing China to devalue), the pan-Islamic war has suddenly gone from simmer to boil, grossly-overvalued equities pretty much everywhere are getting a long-overdue correction, and developed-world political systems are being upended as voters lose faith in mainstream parties to deal with inequality, corporate power, entitlements, immigration, really pretty much everything. For one amusing/amazing example of the latter problem, consider Germany’s response to the mobs of men that suddenly materialized and began molesting women: Cologne mayor slammed after telling German women to keep would-be rapists at arm’s length.
Why do causes matter at times like this? Because where previous crises were “solved” with a relatively simple dose of hyper-easy money, it’s not clear that today’s diverse mix of emerging threats can be addressed in the same way. Interest rates, for instance, were high by current standards at the beginning of past crises, which gave central banks plenty of leeway to comfort the afflicted with big rate cut announcements. Today rates are near zero in most places and negative in many. Cutting from here would be an experiment to put it mildly, with myriad possible unintended consequences including a flight to cash that empties banks of deposits and a destabilizing spike in wealth inequality as negative interest rates support asset prices for the already-rich while driving down incomes for savers and retirees.
And with debt now $57 trillion higher worldwide than in 2008, it’s not at all clear that another borrowing binge will be greeted with enthusiasm by the world’s bond markets, currency traders or entrepreneurs. Here’s that now-famous chart from McKinsey:
Easier money will have no effect on the supply/demand imbalance in the oil market, which is still growing. The likely result: Sharply lower prices in the year ahead, leading to a wave of defaults for trillions of dollars of energy-related junk bonds and derivatives.
As for stock prices, in the previous two crises equities plunged almost overnight to levels that made buying reasonable for the remaining smart money. Today, virtually every major equity index remains high by historical standards, so the necessary crash is still to come — and will add to global turmoil as it unfolds.
The upshot? It really is different this time, in a very bad way. And this fact is just now dawning on millions of leveraged speculators, mutual fund and pension fund managers, individual investors and central bank managers. Right this minute virtually all of them are staring at screens, scrolling over to the sell button, hesitating, pulling up Bloomberg screens showing how much they’ve lost in the past few days, calling analysts who last year convinced them to load up on Apple and Facebook, getting no answer, going back to Bloomberg and then fondling the sell button some more. Think of it as financial collapse OCD.
What happens next? At some point — today or next week or next month, but probably pretty soon — the dam will break. Everyone will hit “sell” at the same time and find out that those liquid markets they’d come to see as normal have disappeared and yesterday’s prices are meaningless fantasy. The exits will slam shut and — as in China last night where the markets closed a quarter-hour into the trading session — the whole world will be stuck with the positions they created back when markets were liquid and central banks were omnipotent and government bonds were risk-free and Amazon was going to $2,000.
And one thought will appear in all those minds: Why didn’t I load up on gold when I had the chance?
http://dollarcollapse.com/money-bubble/perfect-storm/
Carmen Reinhart Warns "Serious Sovereign Debt Defaults" Are Looming
01/01/2016
When it comes to sovereign debt, the term “default” is often misunderstood. It almost never entails the complete and permanent repudiation of the entire stock of debt; indeed, even some Czarist-era Russian bonds were eventually (if only partly) repaid after the 1917 revolution. Rather, non-payment – a “default,” according to credit-rating agencies, when it involves private creditors – typically spurs a conversation about debt restructuring, which can involve maturity extensions, coupon-payment cuts, grace periods, or face-value reductions (so-called “haircuts”).
Like so many other features of the global economy, debt accumulation and default tends to occur in cycles. Since 1800, the global economy has endured several such cycles, with the share of independent countries undergoing restructuring during any given year oscillating between zero and 50% (see figure). Whereas one- and two-decade lulls in defaults are not uncommon, each quiet spell has invariably been followed by a new wave of defaults.
The most recent default cycle includes the emerging-market debt crises of the 1980s and 1990s. Most countries resolved their external-debt problems by the mid-1990s, but a substantial share of countries in the lowest-income group remain in chronic arrears with their official creditors.
Like outright default or the restructuring of debts to official creditors, such arrears are often swept under the rug, possibly because they tend to involve low-income debtors and relatively small dollar amounts. But that does not negate their eventual capacity to help spur a new round of crises, when sovereigns who never quite got a handle on their debts are, say, met with unfavorable global conditions.
And, indeed, global economic conditions – such as commodity-price fluctuations and changes in interest rates by major economic powers such as the United States or China – play a major role in precipitating sovereign-debt crises. As my recent work with Vincent Reinhart and Christoph Trebesch reveals, peaks and troughs in the international capital-flow cycle are especially dangerous, with defaults proliferating at the end of a capital-inflow bonanza.
As 2016 begins, there are clear signs of serious debt/default squalls on the horizon. We can already see the first white-capped waves.
For some sovereigns, the main problem stems from internal debt dynamics. Ukraine’s situation is certainly precarious, though, given its unique drivers, it is probably best not to draw broader conclusions from its trajectory.
Greece’s situation, by contrast, is all too familiar. The government continued to accumulate debt until the burden was no longer sustainable. When the evidence of these excesses became overwhelming, new credit stopped flowing, making it impossible to service existing debts. Last July, in highly charged negotiations with its official creditors – the European Commission, the European Central Bank, and the International Monetary Fund – Greece defaulted on its obligations to the IMF. That makes Greece the first – and, so far, the only – advanced economy ever to do so.
But, as is so often the case, what happened was not a complete default so much as a step toward a new deal. Greece’s European partners eventually agreed to provide additional financial support, in exchange for a pledge from Greek Prime Minister Alexis Tsipras’s government to implement difficult structural reforms and deep budget cuts. Unfortunately, it seems that these measures did not so much resolve the Greek debt crisis as delay it.
Another economy in serious danger is the Commonwealth of Puerto Rico, which urgently needs a comprehensive restructuring of its $73 billion in sovereign debt. Recent agreements to restructure some debt are just the beginning; in fact, they are not even adequate to rule out an outright default.
It should be noted, however, that while such a “credit event” would obviously be a big problem, creditors may be overstating its potential external impacts. They like to warn that although Puerto Rico is a commonwealth, not a state, its failure to service its debts would set a bad precedent for US states and municipalities.
But that precedent was set a long time ago. In the 1840s, nine US states stopped servicing their debts. Some eventually settled at full value; others did so at a discount; and several more repudiated a portion of their debt altogether. In the 1870s, another round of defaults engulfed 11 states. West Virginia’s bout of default and restructuring lasted until 1919.
Some of the biggest risks lie in the emerging economies, which are suffering primarily from a sea change in the global economic environment. During China’s infrastructure boom, it was importing huge volumes of commodities, pushing up their prices and, in turn, growth in the world’s commodity exporters, including large emerging economies like Brazil. Add to that increased lending from China and huge capital inflows propelled by low US interest rates, and the emerging economies were thriving. The global economic crisis of 2008-2009 disrupted, but did not derail, this rapid growth, and emerging economies enjoyed an unusually crisis-free decade until early 2013.
But the US Federal Reserve’s move to increase interest rates, together with slowing growth (and, in turn, investment) in China and collapsing oil and commodity prices, has brought the capital inflow bonanza to a halt. Lately, many emerging-market currencies have slid sharply, increasing the cost of servicing external dollar debts. Export and public-sector revenues have declined, giving way to widening current-account and fiscal deficits. Growth and investment have slowed almost across the board.
From a historical perspective, the emerging economies seem to be headed toward a major crisis. Of course, they may prove more resilient than their predecessors. But we shouldn’t count on it.
Read more at https://www.project-syndicate.org/commentary/sovereign-default-wave-emerging-markets-by-carmen-reinhart-2015-12#DQOViBzwX8V7f3k9.99
The Big Four Economic Indicators: Real Personal Income for November
Doug Short
12/23/2015
Note: This commentary has been updated to include the Real Personal Income Less Transfer Receipts for October.
Official recession calls are the responsibility of the NBER Business Cycle Dating Committee, which is understandably vague about the specific indicators on which they base their decisions. This committee statement is about as close as they get to identifying their method.
There is, however, a general belief that there are four big indicators that the committee weighs heavily in their cycle identification process. They are:
- Nonfarm Employment
- Industrial Production
- Real Retail Sales
- Real Personal Income (excluding Transfer Receipts)
The Latest Indicator Data
Personal Income (excluding Transfer Receipts) in November rose 0.26% and is up 4.2% year-over-year. When we adjust for inflation using the BEA's PCE Price Index, Real Personal Income (excluding Transfer Receipts) rose 0.25%. The real number is up 3.8% year-over-year.
Real PI less TR is one of those indicators that warrants adjustment for population growth. Here is a chart of the series since 2000 adjusted accordingly by using the Civilian Population Age 16 and Over as the divisor.
A Note on the Excluded Transfer Receipts: These are benefits received for no direct services performed. They include Social Security, Medicare & Medicaid, Unemployment Assistance, and a wide range other benefits, mostly from government, but a few from businesses. Here is an illustration Transfer Receipts as a percent of Personal Income.
The Generic Big Four
The chart and table below illustrate the performance of the generic Big Four with an overlay of a simple average of the four since the end of the Great Recession. The data points show the cumulative percent change from a zero starting point for June 2009.
Current Assessment and Outlook
The US economy has been slow in recovering from the Great Recession. Weak Retail Sales and Industrial Production over the past year initially triggered a replay of the "severe winter" meme from last year. However, as we now finish the second month of Q4 of 2015, two of the four indicators are showing relatively consistent growth. Employment and Income have been been trending upward, while Real Sales have remained relatively weak and Industrial Production is essentially in a recession.
For many months the aggregate Big Four have trending sideways. The collective July indicators were within a hair's breadth of setting a new all-time high, but weak Industrial Production has pulled the trend lower.
The next update of the Big Four will be our first peek at December data, namely, the numbers for Nonfarm Employment.
Background Analysis: The Big Four Indicators and Recessions
The charts above don't show us the individual behavior of the Big Four leading up to the 2007 recession. To achieve that goal, we've plotted the same data using a "percent off high" technique. In other words, we show successive new highs as zero and the cumulative percent declines of months that aren't new highs. The advantage of this approach is that it helps us visualize declines more clearly and to compare the depth of declines for each indicator and across time (e.g., the short 2001 recession versus the Great Recession). Here is our four-pack showing the indicators with this technique.
Now let's examine the behavior of these indicators across time. The first chart below graphs the period from 2000 to the present, thereby showing us the behavior of the four indicators before and after the two most recent recessions. Rather than having four separate charts, we've created an overlay to help us evaluate the relative behavior of the indicators at the cycle peaks and troughs. (See the note below on recession boundaries).
The chart above is an excellent starting point for evaluating the relevance of the four indicators in the context of two very different recessions. In both cases, the bounce in Industrial Production matches the NBER trough while Employment and Personal Incomes lagged in their respective reversals.
As for the start of these two 21st century recessions, the indicator declines are less uniform in their behavior. We can see, however, that Employment and Personal Income were laggards in the declines.
Now let's look at the 1972-1985 period, which included three recessions -- the savage 16-month Oil Embargo recession of 1973-1975 and the double dip of 1980 and 1981-1982 (6-months and 16-months, respectively).
And finally, for sharp-eyed readers who can don't mind squinting at a lot of data, here's a cluttered chart from 1959 to the present. That is the earliest date for which all four indicators are available. The main lesson of this chart is the diverse patterns and volatility across time for these indicators. For example, retail sales and industrial production are far more volatile than employment and income.
History tells us the brief periods of contraction are not uncommon, as we can see in this big picture since 1959, the same chart as the one above, but showing the average of the four rather than the individual indicators.
The chart clearly illustrates the savagery of the last recession. It was much deeper than the closest contender in this timeframe, the 1973-1975 Oil Embargo recession. While we've yet to set new highs, the trend has collectively been upward, although we have that strange anomaly caused by the late 2012 tax-planning strategy that impacted the Personal Income.
Here is a close-up of the average since 2000.
Appendix: Chart Gallery with Notes
Each of the four major indicators discussed in this article are illustrated below in three different data manipulations:
A log scale plotting of the data series to ensure that distances on the vertical axis reflect true relative growth. This adjustment is particularly important for data series that have changed significantly over time.
A year-over-year representation to help, among other things, identify broader trends over the years.
A percent-off-high manipulation, which is particularly useful for identifying trend behavior and secular volatility.
Total Nonfarm Employees
There are many ways to plot employment. The one referenced by the Federal Reserve researchers as one of the NBER indicators is Total Nonfarm Employees (PAYEMS).
Industrial Production
The US Industrial Production Index (INDPRO) is the oldest of the four indicators, stretching back to 1919, although we've dropped the earlier decades and started in 1950.
Real Retail Sales
This indicator is a splicing of the discontinued retail sales series (RETAIL, discontinued in April 2001) with the Retail and Food Services Sales (RSAFS) and deflated by the seasonally adjusted Consumer Price Index (CPIAUCSL). We've used a splice point of January 1995 because that date was mentioned in the FRED notes. Our experiments with other splice techniques (e.g., 1992, 2001 or using an average of the overlapping years) didn't make a meaningful difference in the behavior of the indicator in proximity to recessions. We've chained the data to the latest CPI.
Real Personal Income Less Transfer Receipts
This data series is computed by taking Personal Income (PI) less Personal Current Transfer Receipts (PCTR) and deflated using the Personal Consumption Expenditure Price Index (PCEPI). We've chained the data to the latest price index value.
The "Tax Planning Strategies" annotation refers to shifting income into the current year to avoid a real or expected tax increase.
Transfer Payments largely consist of retirement and disability insurance benefits, medical benefits, income maintenance benefits (more here).
The chart below shows the Transfer Payment portion of Personal Income. We've included recessions to help illustrate the impact of the business cycle on this metric.
A Note on Recessions: Recessions are represented as the peak month through the month preceding the trough to highlight the recessions in the charts above. For example, the NBER dates the last cycle peak as December 2007, the trough as June 2009 and the duration as 18 months. The "Peak through the Period preceding the Trough" series is the one FRED uses in its monthly charts, as explained in the FRED FAQs illustrated in this Industrial Production chart.
http://www.advisorperspectives.com/dshort/updates/Big-Four-Economic-Indicators-PI
Economic Illusions vs. Reality; Helicopter Drop, What Else?
By: Mike Shedlock
Dec 26, 2015
Without providing a link, ZeroHedge posted some comments today regarding "Helicopter Drop Theory" by Willem Buiter, Citibank's Chief Economist.
Willem Buiter on Failure of Monetary Policy
We believe that a common factor in the relatively low response of real economic activity to changes in asset prices and yields is probably the fact that the euro area remains highly leveraged. The total debt of households, non-financial enterprises and the general government sector as a share of GDP is higher now than it was at the beginning of the GFC.
The wealth effect of higher stock prices appears to do little to boost private consumer expenditure.
To the extent that monetary policy has had an effect on real activity, and will. This is because part of the effect has been by bringing forward demand from the future, such as major purchases, including for cars or construction.
That suggests that monetary policy, even if and when it has been effective in stimulating activity, will run into diminishing returns even in sustaining the levels of activity it helped to boost.
Economic Illusions vs. Reality
I wholeheartedly agree with every point made above by Buiter. Actually, things are far worse than he stated. The problem is not just in Europe, but everywhere.
With their deflation-fighting tactics, central banks have accomplished five things, none of them any good.
1-Brought demand forward at the expense of future GDP
2-Encouraged more leverage
3-Increased speculation in financial assets
4-Created bubbles in equities and bonds
5-Mistook economic activity for what much of it really is: malinvestment
The solution is not more craziness, but rather an admission that central banks are themselves the source of the problem.
Of course Keynesian fools would never admit such a thing. Instead they promote more and more of what common sense and history proves cannot work.
Willem Buiter Proposes Helicopter Drop
"Helicopter money drops (what else?)"
Our conclusion is that, in a financially-challenged economy like the Eurozone, with policy rates close to the ELB, and with excessive leverage in both the public and private sectors, balance sheet expansion by the central bank alone may not be sufficient to boost aggregate demand by enough to achieve the inflation target in a sustained manner.
This is more than an academic curiosity. Japan has failed to achieve a sustained positive rate of inflation since its great financial crash in 1990. The balance sheet expansion of the Bank of Japan since the crisis has been remarkable but ineffective as regards the achievement of sustained positive inflation and, since 2000, the inflation target. The balance sheet of the Swiss National Bank has expanded even more impressively, again with no discernable impact on the inflation rate.
The case for helicopter money is therefore partly to ensure the euro area (and some other advanced economies) reflate powerfully enough to escape the liquidity trap, rather than settle in a lasting rut of low-flation and low growth, with "emergency" levels of asset purchases and interest rates becoming the norm.
If, as seems possible, the ECB will increase, in H1 2016, the scale of its monthly asset purchases from €60bn to, say, €75bn, and if these additional purchases are concentrated on public debt, the euro area will benefit from a 'backdoor' helicopter money drop -- something long overdue.
Myth of the Deflation Monster
Buiter wants to slay an imaginary monster, deflation.
He moans "Japan has failed to achieve a sustained positive rate of inflation since its great financial crash in 1990."
Other than the absolute mess Japan has gotten into as a direct result of decades of deflation fighting madness, what problem has a lack of sustained positive rate of inflation caused Japan?
The answer is: None.
The bank of Japan is now the entire market for Japanese debt. What positive result stems from that?
The answer once again is: None.
Nonetheless Buiter wants the ECB to pursue the same inane path.
There will be no benefit. Leverage will rise, not sink. And to top it off, debt purchases of the nature he wants are likely illegal under the Maastricht treaty.
Buiter has learned nothing from history. He ought to look in a mirror, admit he sees failure, and resign.
But economic illiterates don't resign, they just keep promoting policies that both common sense and history show can never work.
Challenge to Keynesians
The simple fact of the matter is "Inflation Benefits the Wealthy" (At the Expense of Everyone Else). http://globaleconomicanalysis.blogspot.com/2013/02/reader-asks-me-to-prove-inflation.html
If Buiter disagrees, he can respond to my Challenge to Keynesians "Prove Rising Prices Provide an Overall Economic Benefit" http://globaleconomicanalysis.blogspot.com/2014/10/challenge-to-keynesians-prove-rising.html
http://safehaven.com/article/39965/economic-illusions-vs-reality-helicopter-drop-what-else
It’s Official: Over A Trillion Dollars A Year Will Be Added To The Debt During Obama’s Presidency
By Michael Snyder
December 21st, 2015
Under Barack Obama, the U.S. national debt has risen from $10,626,877,048,913.08 on January 20th, 2009 to $18,795,033,928,275.59 on December 21st, 2015. That means that the debt that we are passing on to future generations has increased by 8.16 trillion dollars since Barack Obama was inaugurated.
There is still a little more than a year to go in Obama’s presidency, and it is already guaranteed that Obama will add more than a trillion dollars a year to the national debt during his presidency. In fact, when you do the math, we are stealing more than 100 million dollars from future generations of Americans every single hour of every single day. It is a crime of a magnitude that is almost unimaginable, and at this point it is mathematically impossible for the U.S. government to pay off all of this debt. To say that we are in trouble would be a massive understatement.
And of course not all of the blame goes to Obama. The Republicans have had control of the House of Representatives for all but two years while Obama has been in the White House, and they have gone along with all of this reckless spending. Without the approval of the House, Obama could not spend a single penny, but the Republicans have consistently chosen not to stand up to him. In fact, the Republicans in Congress just approved another massive 1.2 trillion dollar spending bill that essentially gave the Democrats every single thing that they wanted. House Minority Leader Nancy Pelosi even admitted that the Republicans “were willing to concede so much” during the negotiations.
So why do we even have a Republican Party? They always just go along with pretty much whatever the Democrats want anyway. Why shouldn’t we just disband the Republican Party and let the Democrats completely run things? How would Washington D.C. be any different if the Republicans didn’t even exist?
At this point, even Rush Limbaugh is completely disgusted with the Republican Party…
I have a headline here from the Washington Times: “White House Declares Total Victory Over GOP in Budget Battle.” That headline’s a misnomer. There was never a battle. None of this was opposed. The Republican Party didn’t stand up to any of it, and the die has been cast for a long time on this. I know many of you are dispirited, depressed, angry, combination of all of that. But, folks, there was no other way this could go. Because two years ago when the Republican Party declared they would never do anything that would shut down the government and they would not impeach Obama, there were no obstacles in Obama’s way and there were no obstacles in the way of the Democrat Party.
Do you remember when Republican politicians were running around promising that they would defund Obamacare?
That didn’t happen.
Do you remember when Republican politicians were running around promising that they would defund Planned Parenthood?
That didn’t happen.
Do you remember when Republican politicians were running around promising that they would defund Obama’s refugee program?
That didn’t happen.
In this new spending deal, the Republicans got nothing. It was a sham, a farce and a total insult to the American people. Here is more from Rush Limbaugh…
It fully funds Planned Parenthood. That, to me, is unforgivable, with everything now known about what goes on behind closed doors at Planned Parenthood, and that the federal government, led by a Republican Party, sees fit to pay for it. It is beyond comprehension, and it is a total squandering of moral authority to fully fund the butchery at Planned Parenthood. This spending bill fully pays for Obama’s refugee plans, fully. This spending bill, this budget bill quadruples the number of visas Obama wants for foreign workers. This is even a slap at American union workers. Not the leaders. The union leaders seem to be in favor of it, but blue-collar people, known as working people, have been sold down the river along with everybody else here.
This spending bill even fully pays for every dime asked for by Obama on all of this idiocy that’s tied up into climate change. Everything Obama wanted, everything he asked for, he got. You go down the list of things, it’s there.
Even after watching all of the undercover Planned Parenthood videos that came out over the past year, the Republicans in Congress still voted to fund the harvesting and sale of body parts from aborted babies.
And surveys have found that the American people support the continued funding of Planned Parenthood by about a 2 to 1 margin. After everything that we have seen, the vast majority of Americans still want to continue giving those butchers hundreds of millions of taxpayer dollars a year.
No wonder so many people are comparing America to Nazi Germany these days. We truly have become an exceedingly wicked nation.
We like to think that we are an “example” for the rest of the planet, but in reality the only example that we are is a bad one. Our guilt has been put on display for all the world to see, and yet we just continue to race toward even more evil.
Not only did the Republicans not defund Planned Parenthood, the truth is that not a single pro-life amendment of any sort even got into the bill thanks to Paul Ryan. The following comes from lifesitenews.com…
“The bill failed to include a single major pro-life policy rider, despite the requests of over 120 members of Congress and the disturbing revelations about Planned Parenthood brought to light this year,” said Congresswoman Diane Black, R-TN, who voted against the bill.
The House Freedom Caucus offered a series of amendments to the bill defunding Planned Parenthood, strengthening conscience protections for pro-life physicians and organizations, and ending all U.S. funding for the United Nations Population Fund (UNFPA). The House Rules Committee rejected these riders earlier this week, as Speaker Paul Ryan said he did not want conservative amendments added to the bill that would drive away his Democratic colleagues.
The committee also rejected an amendment to increase vetting of refugees who enter the United States from the terrorist hotbeds of Syria and Iraq, which had previously passed the House, with 47 Democrats adding strong bipartisan support.
Like I said, the Republicans completely capitulated, just like they always do.
Now the U.S. national debt is nearly double the size that it was just before the last financial crisis struck, and our leaders continue to borrow and spend as if there is no tomorrow.
Perhaps they have convinced themselves that there will never be any consequences for acting so foolishly.
Perhaps they believe that in the end everything will turn out okay somehow.
Perhaps they are able to rationalize the theft of more than a hundred million dollars an hour from future generations of Americans.
But nothing can erase what they have done to us. The promising future that our children and our grandchildren should have had has been completely wiped out, and the leading edge of the greatest economic crisis that any of us has ever known is now upon us.
If we had done things differently, things wouldn’t have had to turn out this way. But now the die is cast, and we are all going to pay a very high price for the mistakes that have been made in Washington.
http://theeconomiccollapseblog.com/archives/its-official-more-than-a-trillion-dollars-a-year-will-be-added-to-the-debt-during-obamas-presidency
The Perils of Fed Gradualism
Steven Roach
Dec. 23, 2015
By now, it’s an all-too-familiar drill. After an extended period of extraordinary monetary accommodation, the US Federal Reserve has begun the long march back to normalization. It has now taken the first step toward returning its benchmark policy interest rate – the federal funds rate – to a level that imparts neither stimulus nor restraint to the US economy.
A majority of financial market participants applaud this strategy. In fact, it is a dangerous mistake. The Fed is borrowing a page from the script of its last normalization campaign – the incremental rate hikes of 2004-2006 that followed the extraordinary accommodation of 2001-2003. Just as that earlier gradualism set the stage for a devastating financial crisis and a horrific recession in 2008-2009, there is mounting risk of yet another accident on what promises to be an even longer road to normalization.
The problem arises because the Fed, like other major central banks, has now become a creature of financial markets rather than a steward of the real economy. This transformation has been under way since the late 1980s, when monetary discipline broke the back of inflation and the Fed was faced with new challenges.
The challenges of the post-inflation era came to a head during Alan Greenspan’s 18-and-a-half-year tenure as Fed Chair. The stock-market crash of October 19, 1987 – occurring only 69 days after Greenspan had been sworn in – provided a hint of what was to come. In response to a one-day 23% plunge in US equity prices, the Fed moved aggressively to support the brokerage system and purchase government securities.
In retrospect, this was the template for what became known as the “Greenspan put” – massive Fed liquidity injections aimed at stemming financial-market disruptions in the aftermath of a crisis. As the markets were battered repeatedly in the years to follow – from the savings-and-loan crisis (late 1980s) and the Gulf War (1990-1991) to the Asian Financial Crisis (1997-1998) and terrorist attacks (September 11, 2001) – the Greenspan put became an essential element of the Fed’s market-driven tactics.
This approach took on added significance in the late 1990s, when Greenspan became enamored of the so-called wealth effects that could be extracted from surging equity markets. In an era of weak income generation and seemingly chronic current-account deficits, there was pressure to uncover new sources of economic growth. But when the sharp run-up in equity prices turned into a bubble that subsequently burst with a vengeance in 2000, the Fed moved aggressively to avoid a Japan-like outcome – a prolonged period of asset deflation that might trigger a lasting balance-sheet recession.
At that point, the die was cast. No longer was the Fed responding just to idiosyncratic crises and the market disruptions they spawned. It had also given asset markets a role as an important source of economic growth. The asset-dependent economy quickly assumed a position of commensurate prominence in framing the monetary-policy debate.
The Fed had, in effect, become beholden to the monster it had created. The corollary was that it had also become steadfast in protecting the financial-market-based underpinnings of the US economy.
Largely for that reason, and fearful of “Japan Syndrome” in the aftermath of the collapse of the US equity bubble, the Fed remained overly accommodative during the 2003-2006 period. The federal funds rate was held at a 46-year low of 1% through June 2004, before being raised 17 times in small increments of 25 basis points per move over the two-year period from mid-2004 to mid-2006. Yet it was precisely during this period of gradual normalization and prolonged accommodation that unbridled risk-taking sowed the seeds of the Great Crisis that was soon to come.
Over time, the Fed’s dilemma has become increasingly intractable.
The crisis and recession of 2008-2009 was far worse than its predecessors, and the aftershocks were far more wrenching. Yet, because the US central bank had repeatedly upped the ante in providing support to the Asset Economy, taking its policy rate to zero, it had run out of traditional ammunition.
And so the Fed, under Ben Bernanke’s leadership, turned to the liquidity injections of quantitative easing, making it even more of a creature of financial markets. With the interest-rate transmission mechanism of monetary policy no longer operative at the zero bound, asset markets became more essential than ever in supporting the economy. Exceptionally low inflation was the icing on the cake – providing the inflation-targeting Fed with plenty of leeway to experiment with unconventional policies while avoiding adverse interest-rate consequences in the inflation-sensitive bond market.
Today’s Fed inherits the deeply entrenched moral hazard of the Asset Economy. In carefully crafted, highly conditional language, it is signaling much greater gradualism relative to its normalization strategy of a decade ago. The debate in the markets is whether there will be two or three rate hikes of 25 basis points per year – suggesting that it could take as long as four years to return the federal funds rate to a 3% norm.
But, as the experience of 2004-2007 revealed, the excess liquidity spawned by gradual normalization leaves financial markets predisposed to excesses and accidents. With prospects for a much longer normalization, those risks are all the more worrisome. Early warning signs of troubles in high-yield markets, emerging-market debt, and eurozone interest-rate derivatives markets are particularly worrisome in this regard.
The longer the Fed remains trapped in this mindset, the tougher its dilemma becomes – and the greater the systemic risks in financial markets and the asset-dependent US economy. It will take a fiercely independent central bank to wean the real economy from the markets. A Fed caught up in the political economy of the growth debate is incapable of performing that function.
Only by shortening the normalization timeline can the Fed hope to reduce the build-up of systemic risks. The sooner the Fed takes on the markets, the less likely the markets will be to take on the economy. Yes, a steeper normalization path would produce an outcry. But that would be far preferable to another devastating crisis.
Read more at https://www.project-syndicate.org/commentary/perils-of-fed-gradualism-by-stephen-s--roach-2015-12#TrHC5Jdx2HmJpHWV.99
We Need A "Full And Independent Audit" Of The Federal Reserve
Submitted by Barry Donegan via TruthInMedia.com
12/24/2015
2016 Democratic presidential candidate and U.S. Senator from Vermont Bernie Sanders wrote an op-ed for The New York Times on Wednesday calling for the Federal Reserve to be audited independently by the Government Accountability Office on an annual basis.
Meanwhile, Senate Majority Leader Mitch McConnell (R-Ky.) has scheduled a historic Jan. 12 vote on a bill, colloquially referred to as “Audit the Fed,” which was introduced by Sen. Rand Paul (R-Ky.). The bill would authorize the GAO to perform full audits of the Federal Reserve System.
“To rein in Wall Street, we should begin by reforming the Federal Reserve, which oversees financial institutions and which uses monetary policy to maintain price stability and full employment. Unfortunately, an institution that was created to serve all Americans has been hijacked by the very bankers it regulates,” wrote Sen. Sanders.
He added, “What went wrong at the Fed? The chief executives of some of the largest banks in America are allowed to serve on its boards. During the Wall Street crisis of 2007, Jamie Dimon, the chief executive and chairman of JPMorgan Chase, served on the New York Fed’s board of directors while his bank received more than $390 billion in financial assistance from the Fed. Next year, four of the 12 presidents at the regional Federal Reserve Banks will be former executives from one firm: Goldman Sachs.”
Sanders called for the Glass-Steagall Act to be reinstated, a Depression-era banking regulation that created a wall of separation between consumer and investment banks prior to its repeal by former President Bill Clinton.He also suggested that the Fed should be prevented from providing incentives to encourage banks to sit on cash reserves.
“As a condition of receiving financial assistance from the Fed,” said Sanders, “large banks must commit to increasing lending to creditworthy small businesses and consumers, reducing credit card interest rates and fees, and providing help to underwater and struggling homeowners.”
Sanders argued that the Federal Reserve suffers from a lack of transparency. “In 2010, I inserted an amendment in Dodd-Frank to audit the emergency lending by the Fed during the financial crisis. We need to go further and require the Government Accountability Office to conduct a full and independent audit of the Fed each and every year,” he said.
Audit the Fed legislation first became a hot political topic as a result of the sudden, meteoric 2008 rise to popularity of libertarian icon and former Congressman Ron Paul (R-Texas), who made the push for Fed transparency a central focus of his entire political career.
The Dodd-Frank amendment that Sen. Sanders is referring to that provided for a limit back in 2010, as Paul felt that Sanders had hijacked his momentum for a full audit and replaced it with a more limited, watered-down version. Congressman Paul’s full Audit the Fed legislation had already passed the House prior to Sanders’ push for a tamer audit in the Senate.
In the above-embedded video from 2010, an irate Ron Paul can be seen saying,
“I had expected Bernie Sanders to offer S. 604 which is the same as H.R. 1207, which is Audit the Fed bill, and at the last minute he switched it and watered it down and, really, it adds nothing. It’s a possibility that it even makes the current conditions worse… We need to get as many messages as possible to any senator you can think of — especially to Bernie Sanders’ office — that we don’t want this version. We want a true audit of the Fed. We need to know what the Open Market Committee does and we need to know what they’re doing overseas with the agreements with central banks and financial institutions and other governments.”
http://www.zerohedge.com/news/2015-12-24/bernie-sanders-we-need-full-and-independent-audit-federal-reserve
The Plutocrats Are Winning. Don't Let Them!
Wednesday, 23 December 2015 00:00
By Bill Moyers, Moyers & Company
In the fall of 2001, in the aftermath of 9/11, as families grieved and the nation mourned, Washington swarmed with locusts of the human kind: wartime opportunists, lobbyists, lawyers, ex-members of Congress, bagmen for big donors: all of them determined to grab what they could for their corporate clients and rich donors while no one was looking.
Across the land, the faces of Americans of every stripe were stained with tears. Here in New York, we still were attending memorial services for our firemen and police. But in the nation's capital, within sight of a smoldering Pentagon that had been struck by one of the hijacked planes, the predator class was hard at work pursuing private plunder at public expense, gold-diggers in the ashes of tragedy exploiting our fear, sorrow, and loss.
What did they want? The usual: tax cuts for the wealthy and big breaks for corporations. They even made an effort to repeal the alternative minimum tax that for fifteen years had prevented companies from taking so many credits and deductions that they owed little if any taxes. And it wasn't only repeal the mercenaries sought; they wanted those corporations to get back all the minimum tax they had ever been assessed.
They sought a special tax break for mighty General Electric, although you would never have heard about it if you were watching GE's news divisions - NBC News, CNBC, or MSNBC, all made sure to look the other way.
They wanted to give coal producers more freedom to pollute, open the Alaskan wilderness to drilling, empower the president to keep trade favors for corporations a secret while enabling many of those same corporations to run roughshod over local communities trying the protect the environment and their citizens' health.
It was a disgusting bipartisan spectacle. With words reminding us of Harry Truman's description of the GOP as "guardians of privilege," the Republican majority leader of the House dared to declare that "it wouldn't be commensurate with the American spirit" to provide unemployment and other benefits to laid-off airline workers. As for post 9/11 Democrats, their national committee used the crisis to call for widening the soft-money loophole in our election laws.
America had just endured a sneak attack that killed thousands of our citizens, was about to go to war against terror, and would soon send an invading army to the Middle East. If ever there was a moment for shared sacrifice, for putting patriotism over profits, this was it. But that fall, operating deep within the shadows of Washington's Beltway, American business and political mercenaries wrapped themselves in red, white and blue and went about ripping off a country in crisis. H.L. Mencken got it right: "Whenever you hear a man speak of his love for his country, it is a sign that he expects to be paid for it."
Fourteen years later, we can see more clearly the implications. After three decades of engineering a winner-take-all economy, and buying the political power to consummate their hold on the wealth created by the system they had rigged in their favor, they were taking the final and irrevocable step of separating themselves permanently from the common course of American life. They would occupy a gated stratosphere far above the madding crowd while their political hirelings below look after their earthly interests.
The $1.15 trillion spending bill passed by Congress last Friday and quickly signed by President Obama is just the latest triumph in the plutocratic management of politics that has accelerated since 9/11. As Michael Winship and I described here last Thursday, the bill is a bonanza for the donor class - that powerful combine of corporate executives and superrich individuals whose money drives our electoral process. Within minutes of its passage, congressional leaders of both parties and the president rushed to the television cameras to praise each other for a bipartisan bill that they claimed signaled the end of dysfunction; proof that Washington can work.
Mainstream media (including public television and radio), especially the networks and cable channels owned and operated by the conglomerates, didn't stop to ask: "Yes, but work for whom?" Instead, the anchors acted as amplifiers for official spin - repeating the mantra-of-the-hour that while this is not "a perfect bill," it does a lot of good things. "But for whom? At what price?" went unasked.
Now we're learning. Like the drip-drip-drip of a faucet, over the weekend other provisions in the more than 2000-page bill began to leak. Many of the bad ones we mentioned on Thursday are there - those extended tax breaks for big business, more gratuities to the fossil fuel industry, the provision to forbid the Securities & Exchange Commission from requiring corporations to disclose their political spending, even to their own shareholders. That one's a slap in the face even to Anthony Kennedy, the justice who wrote the Supreme Court's majority opinion in Citizens United. He said: "With the advent of the Internet, prompt disclosure of expenditures can provide shareholders and citizens with the information needed to hold corporations and elected officials accountable for their positions."
Over our dead body, Congress declared last Friday, proclaiming instead: Secrecy today. Secrecy tomorrow. Secrecy forever. They are determined that we not know who owns them.
The horrors mount. As Eric Lipton and Liz Moyer reported for The New York Times on Sunday, in the last days before the bill's passage "lobbyists swooped in" to save, at least for now, a loophole worth more than $1 billion to Wall Street investors and the hotel, restaurant and gambling industries. Lobbyists even helped draft crucial language that the Senate Democratic leader Harry Reid furtively inserted into the bill. Lipton and Moyer wrote that, "The small changes, and the enormous windfall they generated, show the power of connected corporate lobbyists to alter a huge bill that is being put together with little time for lawmakers to consider. Throughout the legislation, there were thousands of other add-ons and hard to decipher tax changes."
No surprise to read that "some executives at companies with the most at stake are also big campaign donors." The Times reports that "the family of David Bonderman, a co-founder of TPG Capital, has donated $1.2 million since 2014 to the Senate Majority PAC, a campaign fund with close ties to Mr. Reid and other Senate Democrats." Senator Reid, lest we forget, is from Nevada. As he approaches retirement at the end of 2016, perhaps he's hedging his bets at taxpayer expense.
Consider just two other provisions: One, insisted upon by Republican Senator Thad Cochran, directs the Coast Guard to build a $640 million National Security Cutter in Cochran's home state of Mississippi, a ship that the Coast Guard says it does not need. The other: A demand by Maine Republican Senator Susan Collins for an extra $1 billion for a Navy destroyer that probably will be built at her state's Bath Iron Works - again, a vessel our military says is unnecessary.
So it goes: The selling off of the Republic, piece by piece. What was it Mark Twain said? "There is no distinctive native American criminal class except Congress."
Can we at least face the truth? The plutocrats and oligarchs are winning. The vast inequality they are creating is a death sentence for government by consent of the people at large. Did any voter in any district or state in the last Congressional election vote to give that billion dollar loophole to a handful of billionaires? To allow corporations to hide their political contributions? To add $1.4 trillion to the national debt? Of course not. It is now the game: Candidates ask citizens for their votes, then go to Washington to do the bidding of their donors. And since one expectation is that they will cut the taxes of those donors, we now have a permanent class that is afforded representation without taxation.
A plutocracy, says my old friend, the historian Bernard Weisberger, "has a natural instinct to perpetuate and enlarge its own powers and by doing so slams the door of opportunity to challengers and reduces elections to theatrical duels between politicians who are marionettes worked by invisible strings."
Where does it end?
By coincidence, this past weekend I watched the final episode of the British television series Secret State, a 2012 remake of an earlier version based on the popular novel A Very British Coup. This is white-knuckle political drama. Gabriel Byrne plays an accidental prime minister - thrust into office by the death of the incumbent, only to discover himself facing something he never imagined: a shadowy coalition of forces, some within his own government, working against him. With some of his own ministers secretly in the service of powerful corporations and bankers, his own party falling away from him, press lords daily maligning him, the opposition emboldened, and a public confused by misinformation, deceit, and vicious political rhetoric, the prime minister is told by Parliament to immediately invade Iran (on unproven, even false premises) or resign. In the climactic scene, he defies the "Secret State" that is manipulating all this and confronts Parliament with this challenge:
Let's forget party allegiance, forget vested interests, forget votes of confidence. Let each and every one of us think only of this: Is this war justified? Is it what the people of this country want? Is it going to achieve what we want it to achieve? And if not, then what next?
Well, I tell you what I think we should do. We should represent the people of this country. Not the lobby companies that wine and dine us. Or the banks and the big businesses that tell us how the world goes 'round. Or the trade unions that try and call the shots. Not the civil servants nor the war-mongering generals or the security chiefs. Not the press magnates and multibillion dollar donors… [We must return] democracy to this House and the country it represents.
Do they? The movie doesn't tell us. We are left to imagine how the crisis - the struggle for democracy - will end.
As we are reminded by this season, there is more to life than politics. There are families, friends, music, worship, sports, the arts, reading, conversation, laughter, celebrations of love and fellowship and partridges in pear trees. But without healthy democratic politics serving a moral order, all these are imperiled by the ferocious appetites of private power and greed.
So enjoy the holidays, including Star Wars. Then come back after New Year's and find a place for yourself, at whatever level, wherever you are, in the struggle for democracy. This is the fight of our lives and how it ends is up to us.
http://www.truth-out.org/opinion/item/34149-the-plutocrats-are-winning-don-t-let-them#14509932035971&action=collapse_widget&id=0&data=
What Fresh Horror Awaits The Economy After Fed Rate Hike?
Submitted by Brandon Smith via Alt-Market.com,
12/23/2015
There is one predominant reality that must be understood before a person can grasp the nature of the Federal Reserve and the decisions it makes, and that reality is this: The Fed’s purpose is not to defend or extend American markets or the dollar; the Fed’s job is ultimately to DESTROY American markets and the dollar. I have been repeating this little fact for years because it seems as though many otherwise intelligent people simply will not accept the truth, which is why they have trouble comprehending the actions that the Fed initiates.
When analysts make the claim that the Fed has positioned itself "between a rock and a hard place" in terms of policy, this is not entirely true. The Fed is exactly where it wants to be in terms of policy; but the central bank has indeed positioned the U.S. ECONOMY between a rock and a hard place, by design.
Globalists see the U.S. dollar and the U.S. economy as expendable (for the most part), and this sacrifice is meant to create distracting chaos as well as geopolitical advantage towards a new fully centralized world economic system. You can read the considerable evidence for this agenda in my article 'The Fall Of America Signals The Rise Of The New World Order'.
If you believe the Fed is the sole purveyor of the global economic crisis and is at the top of the internationalist pyramid, then you probably predicted that the privately controlled central bank would “never in a million years” raise interest rates (many prominent people within the alternative economic scene did). If you believe that the Fed’s primary goal is to prolong the life span of the “American empire,” again, you probably predicted that the Fed would never raise interest rates. There is a serious normalcy bias when it comes to parts of the alternative economic world and their position on the Federal Reserve. They refuse to acknowledge that the Fed is a deliberately preset time bomb meant to vaporize the U.S. economic system and currency. And as long as this continues, they will never be able to determine what is likely to happen next within our fiscal structure.
There is no way around it: If you cannot grasp the root motivations of the Fed, then you will become cognitively crippled in your struggle to see the next pitfall in the near-term economic future.
In August, I made this prediction concerning the Fed rate hike decision:
"The Federal Reserve push for a rate hike will likely be determined before 2015 is over. Talk of a September increase in interest rates may be a ploy, and a last-minute decision to delay could be on the table. This tactic of edge-of-the-seat meetings and surprise delays was used during the QE taper scenario, which threw a lot of analysts off their guard and caused many to believe that a taper would never happen. Well, it did happen, just as a rate hike will happen, only slightly later than mainstream analysts expect.
If a delay occurs, it will be short-lived, triggering a dead cat bounce in stocks, with rates increasing by December as dismal retail sales become undeniable leading into the Christmas season."
I made the prediction (as well as my prediction on the taper in 2013) on the foundation that the Fed is only an appendage of a greater elitist banking machine. The Fed as an institutional idea is not sacrosanct for the elites, and is at the very least replaceable. The dollar is slated for demolition. And though it may continue on for a time in a more marginalized capacity, the “Fed note” as we know it today will soon be crushed under the weight of what the International Monetary Fund calls the “global economic reset.” In other words, every part of my prediction turned out correct because I accepted the reality that the Fed will invariably take the most destructive policy actions at the worst possible time with the purpose of crisis in mind.
Central bankers also have a tendency to follow patterns. They rarely change strategies on a whim. Most of the decisions we see made by the Fed, the European Central Bank, the Bank of Japan, etc. were likely made months, if not years, in advance and follow the same strategies used during previous crises.
For example, the Fed process of raising interest rates this December followed almost exactly the process they used to introduce the taper of QE3 in 2013: a buildup of rhetoric in mainstream news during the first half of the year and then a fake-out in September, followed by months of uncertainty in markets and then quick passage of the policy in December. The Fed also has a habit of raising interest rates at the onset of economic instability or right in the middle of a downturn, as it did in 1928-1929, triggering the Great Depression, and in 1931, adding fuel to the fire of financial catastrophe. These particular catalyzing policy actions are partly what Ben Bernanke was referring to on Nov. 8, 2002, in a speech given at “A Conference to Honor Milton Friedman … On the Occasion of His 90th Birthday”:
"In short, according to Friedman and Schwartz, because of institutional changes and misguided doctrines, the banking panics of the Great Contraction were much more severe and widespread than would have normally occurred during a downturn.
Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again."
Based on this pattern of policy actions leading to fiscal disaster, I believe alternative analysts can predict with some certainty what is likely to happen now that the Fed has raised rates in the middle of the most pervasive economic contraction since the Great Depression was initiated (as Bernanke admitted) by central bankers. Here are some trends that I believe will become exponential as we move into 2016.
Market Turmoil Going Critical
This might seem like an easy prediction to make; the IMF and the Bank for International Settlements have both been publishing “warnings” on a possible negative financial event if the Fed were to raise rates. I just want to point out first that the Federal Reserve takes its marching orders from the BIS, so the BIS would certainly know if a Fed policy change will result in collapse. We don't have to make predictions, we only have to look at where the BIS is positioning itself in order to appear as though it is a prognosticator with our "best interests" at heart.
Second, market turmoil is a guarantee given the fact that banks and corporations have been utterly reliant on near-zero interest rates and free overnight lending from the Fed. They have been using these no-cost and low-cost loans primarily for stock buybacks, purchasing back their own stocks and reducing the number of shares on the market, thereby artificially elevating the value of the remaining shares and driving up the market as a whole. Now that near-zero lending is over, these banks and corporations will not be able to afford constant overnight borrowing, and the buybacks will cease. Thus, stock markets will crash in the near term.
This process has already begun with increased volatility leading up to and after the Fed rate hike. Watch for far more erratic stock movements (300 to 500 points or more) up and down taking place more frequently, with the overall trend leading down into the 15,000-point range for the Dow in the first two quarters of 2016. Extraordinary but short lived positive increases in the markets will occur at times (Christmas and New Year’s tend to result in positive rallies), but shock rallies are just as much a sign of volatility and instability as shock crashes.
It is hard to say how fast and how far markets will drop by the end of 2016. I believe we will see a repeat of the 2008-2009 market chaos, but we are entering into some unknown territory being that the crisis we are experiencing is not a purely deflationary one like the Great Depression. Rather, this is a “stagflationary” collapse with elements of the Great Depression and the Weimar inflationary disaster.
The Fed Will Continue To Hike Interest Rates
I believe the Fed will continue to hike rates throughout 2016 despite any current or future negative economic signals. It has ignored the global contraction so far and will ignore future events. Why? The Fed is setting the stage for a collapse. Period.
Mainstream analysts claim skepticism over the Fed’s publicly announced “dot plot” schedule of at least four rate hikes in 2016. I am not skeptical. I think they are going for broke and opening the gates to fiscal hell.
But wouldn’t rate hikes result in a stronger and more desirable dollar? Possibly, in the short term. However, many people are unaware that a supposedly “strong” dollar index relative to other national currencies is just as much a death knell for the greenback as a weak dollar index.
Petrodollar Status Lost
Oil producers have refused to cut production despite the fact that many nations no longer have storage capacity for excess reserves.
International demand continues to decline, causing a global oil glut so intense that tankers carrying oil are now being forced to sit offshore waiting for space to dump their cargo. Some are even turning around mid-trip and going back to where they came from.
Why have OPEC nations refused to cut production? Because they plan to diversify away from the dollar and into a basket of currencies in order to “stabilize” oil prices, rather than reduce supply. The icing on the cake is the recent decision by Congress and the Obama administration to allow the removal of the 40-year-old oil export ban within the U.S. With the lifting of the ban, the U.S. now becomes a competitor in the global oil market in the middle of the worst oil glut since the early 1980s. This might not seem like the smartest move to many analysts, but the Fed is not the only institution out to derail the United States. Certain elitists within our own government are also making the worst possible decisions at the worst possible time, and they are doing this quite deliberately.
According to the current developments in oil markets, I believe the next major economic trigger event will be the removal of the dollar’s petro-currency status. The “strong” dollar (relative to the dollar index) is now driving down prices at a rate that is giving OPEC nations whiplash. Saudi Arabia has already hinted at a depeg from the dollar, as low oil value continues to drive oil producers into debt.
With the U.S. now entering the market as an oil competitor, I do not see any compelling reason for OPEC nations to continue pegging oil sales to the dollar. With the loss of petrostatus, the dollar will be progressively torn apart. This will lead into the eventual removal of the dollar’s world reserve status, which I have been warning about for years, most recently in my article “The Global Economic Reset Has Begun.”
Geopolitical Distractions
I do not see all of these economic developments taking place in an open vacuum. It makes far more sense for them to progress in the background during geopolitical upheaval with terrorism being the main distraction for the general public. I believe 2016 will be labeled the “year of the terrorist,” as ISIS attacks expand to every corner of the U.S. and in numerous EU nations. This “fog of war” is completely necessary to hide the actions of the most dangerous terrorists: international financiers and elites bent on morphing entire global political and financial structures into something more centralized and more sinister.
Other distractions are certainly possible, but there are far too many trigger points around the world at this time to make any kind of prediction as to which ones (if any) will be used. The false East/West paradigm continues and is useful in that it provides a rationale for the eventual dump of the U.S. dollar by Eastern nations (including China). Russian and NATO tensions could be used to foment regional wars or even a world war if that is in the cards. I do not see this as the endgame, though.
Rather, economic collapse is the greatest weapon at the disposal of globalists.
National panic, riots, looting, starvation, magnified crime: All of these things result in mass die-offs and desperation. Desperation leads to calls for "strong leadership", and strong leadership usually results in totalitarianism. It might seem sensationalist to tie all of these possible outcomes to the Fed rate hike decision, but give it a little time. Those who make accusations of sensationalism and “fear mongering” today will be asserting tomorrow that such developments were “easily predictable.”
http://www.zerohedge.com/news/2015-12-23/what-fresh-horror-awaits-economy-after-fed-rate-hike
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