- Chinese Professor Writing for Pine River Capital Says China Will Win Trade War with America
The shills over at the Minnesota based hedge fund, Pine River, are making the media rounds these evening, after issuing a letter featuring a Hong Kong Professor named James Wang who said China would defeat the United States in a trade war. The entire article is suspect and wreaks of enemy propaganda.
Have a look, penned by <<<Bei Hu>>> (hmm).
This is what Wang had to say about a prospective trade war with the US, which includes Trump slapping the shit out of China with 45% tariffs.
“By design, decision-makers in a democracy face difficulties coordinating a relief effort and must eventually face a political backlash from impacted domestic producers,” Wang wrote. “On this basis, the Chinese may have more runway to play the long game in a trade war.”
“The balance of power worldwide is much more diffuse compared to the early 20th century, and players like China and India have emerged to create new political centers of gravity,” Wang wrote.
“However, as economic and political paralyses spread across the developed world, the most likely outcome is a trade war.”
In other words, Pine Capital believes America is finished and the balance of power now lies in Beijing.
The math, however, tells a different story, as China enjoys nearly a $300 billion per annum trade surplus with the United States, wholly dependent on the US consumer to keep their bedraggled populace at bay, saddled with incredibly high levels of debt (250%+) and soaring NPLs.
Goldman analyst, Kinger Lau, believes punitive tariffs will clown-rape China’s GDP by 3% in 2017. Kevin Lau from Daiwa Capital isn’t as optimistic as Goldman. He thinks an American-Sino trade war will result in an 87% drop in Chinese exports to the US — a drop of $420 billion. That would equate to a 4.85% blow to the Chinese parasitical ‘economy.’
Even in a Trump light environment of just 15% tariffs, Chinese GDP stands to drop by 1.8%, according to Daiwa.
China’s protest would involve selling US treasuries, which have proven to be meaningless with QE programs and they might give Boeing, Ford and GM the boot. They might shut down a few disgusting KFC restaurants too.
Bottom line: Investors freak the fuck out when China misses by one tenth of one percent. Can you imagine if Chinese exports dropped by $420 billion or 87%?
Content originally generated at iBankCoin.com
- 2016: The Terrible, Horrible, No Good, Very Bad Year
“What’s past is prologue.” ? William Shakespeare, The Tempest
What a terrible, horrible, no good, very bad year this has been.
Endless wars. Toxic politics. Violence. Hunger. Police shootings. Mass shootings. Economic downturns. Political circuses. Senseless tragedies. Loss. Heartache. Intolerance. Prejudice. Hatred. Apathy. Meanness. Cruelty. Poverty. Inhumanity. Greed.
Here’s just a small sampling of what we’ve suffered through in 2016.
After three years of increasingly toxic politics, the ruling oligarchy won and “we the people” lost. The FBI’s investigation of Hillary’s emails ended with a whimper, rather than a bang. FBI director James Comey declared Clinton’s use of a private email server to be careless rather than criminal. Bernie Sanders sparked a movement only to turn into a cheerleader for Hillary Clinton. Clinton won the popular vote but lost the election. Donald Trump won the White House while the American people lost any hope of ending the corporate elite’s grip on the government.
The government declared war on so-called “fake news” while continuing to peddle its own brand of propaganda. President Obama quietly re-upped the National Defense Authorization Act, including a provision that establishes a government agency to purportedly counter propaganda and disinformation.
More people died at the hands of the police. Shootings of unarmed citizens (especially African-Americans) by police claimed more lives than previously estimated, reinforcing concerns about police misconduct and the use of excessive force. Police in Baton Rouge shot Alton Sterling. Police in St. Paul shot Philando Castile during a traffic stop. Ohio police shot 13-year-old Tyre King after the boy pulls out a BB gun. Wisconsin was locked down after protests erupt over a police shooting of a fleeing man. Oklahoma police shot and killed Terence Crutcher during a traffic stop while the man’s hands were raised in the air. North Carolina police killed Keith Lamont Scott, spurring two nights of violent protests. San Diego police killed Alfred Olango after he removed a vape smoking device from his pocket. Los Angeles police shot Carnell Snell Jr. after he fled a vehicle with a paper license plate.
We lost some bright stars this year. Supreme Court justice Antonin Scalia’s death left the court deadlocked and his successor up for grabs. Joining the ranks of the notable deceased were Muhammad Ali, David Bowie, Fidel Castro, Leonard Cohen, Carrie Fisher, John Glenn, Merle Haggard, Harper Lee, George Michael, Prince, Nancy Reagan, Janet Reno, Elie Wiesel, and Gene Wilder.
Diseases claimed more lives. The deadly Zika virus spread outwards from Latin America and into the U.S.
The rich got richer. The Panama Papers leak pulled back the curtain on schemes by the wealthy to hide their funds in shell companies.
Free speech was dealt one knock-out punch after another. First Amendment activities were pummeled, punched, kicked, choked, chained and generally gagged all across the country. The reasons for such censorship varied widely from political correctness, safety concerns and bullying to national security and hate crimes but the end result remained the same: the complete eradication of what Benjamin Franklin referred to as the “principal pillar of a free government.”
The debate over equality took many forms. African-Americans boycotted the Oscars over the absence of nominations for people of color, while the Treasury Department announced its decision to replace Andrew Jackson with Harriet Tubman on the $20 bill. North Carolina’s debate over transgender bathrooms ignited a nationwide fury. Meanwhile, the U.S. military opened its doors to transgender individuals. A unanimous Supreme Court affirmed a Texas law that counts everyone, not just eligible voters, in determining legislative districts. The nation’s highest court also upheld affirmative action, while declaring a Texas law on abortion clinics to be an unnecessary burden on women.
Environmental concerns were downplayed in favor of corporate interests. Flint, Michigan’s contaminated water was declared a state and federal emergency, while thousands protested the construction of the Dakota Access Pipeline and its impact on water sources.
Technology rendered Americans vulnerable to threats from government spies, police, hackers and power failures. The Justice Department battled Apple in court over access to its customers’ locked, encrypted iPhones. Microsoft sued the U.S. government over its access to customers’ emails and files without their knowledge. Yahoo confirmed that over half a billion user accounts had been hacked. Police departments across the country continued to use Stingray devices to collect cellphone data in real time, often without a warrant. A six-hour system shutdown resulted in hundreds of Delta flights being cancelled and thousands of people stranded.
Police became even more militarized and weaponized. Despite concerns about the government’s steady transformation of local police into a standing military army, local police agencies continued to acquire weaponry, training and equipment suited for the battlefield. In North Dakota, for instance, police were authorized to acquire and use armed drones. Likewise, the use of SWAT teams for routine policing tasks has increased the danger for police and citizens alike.
Children were hurt. A 17-year-old endangered silverback gorilla was shot preemptively after a 3-year-old child climbed into its zoo enclosure. In Disney World, an alligator snatched a 2-year-old boy off one of the resort’s man-made beaches. A school bus crash in Tennessee killed five children. And police resource officers made schools less safe, with students being arrested, tasered and severely disciplined for minor infractions.
Computers asserted their superiority over their human counterparts, who were easily controlled by bread and circuses. Google’s artificial intelligence program, AlphaGo, defeated its human opponent in a DeepMind Challenge Match. Pokemon Go took the world by storm and turned users into mindless entertainment zombies.
Terrorism took many forms. Brussels was locked down in the wake of terrorist attacks that killed dozens and wounded hundreds. A shootout between a gunman and police wrought havoc on a gay nightclub in Orlando. Terrorists armed with explosives and guns opened fire in Istanbul Airport. A trucker drives into a crowd of revelers on Bastille Day in France. Acts of suspected terrorism take place throughout Germany, including attacks using axes, knives and machetes. Japan undergoes a mass killing when a man armed with a knife targets disabled patients at a care facility. Syria continued to be ravaged by bomb strikes, terrorism and international conflict.
Science crossed into new frontiers. Doctors announced the birth of the first healthy three-parent baby created with DNA from three separate people. Elon Musk outlined his plan to populate Mars.
Tragedies abounded. An Amtrak train derailed outside of Philadelphia. A commuter train crashed through a barrier in New Jersey. Floods in Texas killed nine soldiers stationed at Fort Hood. Heatwaves swept the southwest, fueling wildfires. Flash floods and heavy rain devastated parts of Maryland and Louisiana.
The government waged a war on cash. Not content to swindle, cheat, scam, and generally defraud Americans by way of wasteful pork barrel legislation, asset forfeiture schemes, and costly stimulus packages, the government and its corporate partners in crime came up with a new scheme to not only scam taxpayers out of what’s left of their paychecks but also make us foot the bill. The government’s war on cash is a concerted campaign to do away with large bills such as $20s, $50s, $100s and shift consumers towards a digital mode of commerce that can easily be monitored, tracked, tabulated, mined for data, hacked, hijacked and confiscated when convenient.
The Deep State reared its ugly head. Comprised of unelected government bureaucrats, corporations, contractors, paper-pushers, and button-pushers who are actually calling the shots behind the scenes, this government within a government is the real reason “we the people” have no real control over our so-called representatives. It’s every facet of a government that is no longer friendly to freedom and is working overtime to trample the Constitution underfoot and render the citizenry powerless in the face of the government’s power grabs, corruption and abusive tactics. These are the key players that drive the shadow government. They are the hidden face of the American police state that has continued past Election Day.
The U.S. military industrial complex—aided by the Obama administration—armed the world while padding its own pockets. According to the Center for International Policy, President Obama has brokered more arms deals than any administration since World War II. For instance, the U.S. agreed to provide Israel with $38 billion in military aid over the next ten years, in exchange for Israel committing to buy U.S. weapons.
Now that’s not to say that 2016 didn’t have its high points, as well, but it’s awfully hard to see the light at the end of the tunnel right now.
Frequently, I receive emails from people urging me to leave the country before the “hammer falls.” However, as I make clear in my book Battlefield America: The War on the American People, there is nowhere in the world to escape from the injustice of tyrants, bullies and petty dictators. As Ronald Reagan recognized back in 1964, “If we lose freedom here, there is no place to escape to. This is the last stand on Earth.”
Let’s not take the mistakes of 2016 into a new year with us. The election is over. The oligarchs remain in power. The police state is marching forward, more powerful than ever. All signs point to business as usual. The game continues to be rigged.
The lesson for those of us in the American police state is simply this: if there is to be any hope for freedom in 2017, it rests with “we the people” engaging in local, grassroots activism that transforms our communities and our government from the ground up.
Let’s get started.
- Post-Election Sale
Still too rich?
- India Fears Run On Banks: Capital Controls And Withdrawal Limits To Continue
Indian banks are fearful of running out of cash as lines queue up to withdraw money.
Bankers say they cannot cope with any sudden increase in demand, and warn against lifting cash withdrawal limits.
A decision by New Delhi on November 8 to scrap all large-denomination banknotes overnight removed 86 per cent of India’s currency from circulation. In an effort to prevent banks running out of cash, the finance ministry then imposed strict limits on the amount of new notes that could be withdrawn. Customers can currently withdraw just Rs2,500 from an ATM per day — equivalent to $37 — or Rs24,000 over the counter per week.
“If the government lifts the limits on Friday and there is a sudden rush, banks will be totally dependent on the central bank to give them enough liquidity,” said Soumyajit Niyogi, associate director at India Ratings and Research. “The Reserve Bank of India has been giving assurances that it has enough cash but reports of how much currency there currently is in the system suggest this might not be the case.”
New Delhi claims that purging most of India’s old cash supply, and replacing it with a smaller quantity of new banknotes, will eliminate illicitly earned or unaccounted for income that has been beyond the reach of tax officials.
But as of December 19, banks had replaced just 38 per cent of the Rs15.3tn in demonetised notes that was sucked out of the system by November’s announcement, according to RBI data.
The figures have alarmed bankers, who are now urging the government not to lift the curbs immediately. One executive said: “The government and the RBI need to make sure there is enough cash in the system before they lift the withdrawal limits.” A private banker told the Indian Express newspaper: “If the limits are relaxed, people will ask for more cash and there is limited cash. This will only turn banks into villains.”
When the policy was first announced, the government estimated that Rs5tn would remain undeclared as it would be part of illicit money hoards. But R Gandhi, RBI deputy governor, said earlier this month that over Rs12tn had already been handed back, and a newspaper report on Wednesday said the figure had since climbed to Rs14tn, leaving just over Rs1tn remaining.
This suggests either that the amount of illicit money in the system was overestimated by the government – or that new ways to launder cash have been discovered despite the government’s efforts.
The RBI did not respond to a request to comment.
More Experiments Coming
Speculation is rife that further unorthodox measures are coming: Modi to Crank Up Campaign Against India’s Black Money.
Well before India’s surprise ban on using 86 per cent of its cash supply, rightwing circles were abuzz with speculation about prime minister Narendra Modi taking such a step to fight so-called black money.
Mainstream economists paid little heed to the chatter — deeming it “too preposterous” to take seriously, given the economic damage it would inflict.
But with India now reeling from the acute cash crunch triggered by the decision to cancel its old Rs500 and Rs1,000 notes, many economists and observers are debating what other unorthodox economic policy experiments may lie ahead.
Mr Modi is expected to intensify his campaign against black money, with his next target likely to be property purchased with illicit wealth and not registered in the true owners’ names. Speculation is rife that he is also seriously considering other dramatic and unusual reform measures — including possibly abolishing income tax and replacing it with a banking transaction tax.
Expect More Pain, Failures
The hit to India’s GDP will be much larger than expected.
Nonetheless, it appears that Modi is prepared to follow up with the popular economic philosophy: If it doesn’t work, do more of it.
- With China Facing Currency, Liquidity Crises, Ex-PBOC Official Urges Use Of "Nuclear Option"
With the PBOC fighting tooth and nail to slow outbound capital flight, which according to Goldman has reached $1.1 trillion since August 2015, and which these days mostly means keeping the Yuan from depreciating to new all time lows below 7 Yuan to the Dollar, the Chinese central bank may have its work cut out for it in the immediate future. The reason is that, as Bloomberg reminds us, the first day of 2017 is when an annual $50,000 quota to convert the yuan into foreign exchange resets, stoking concern there will be a rush to sell the local currency.
With tax payments and a regulatory assessment also tightening liquidity in the money market toward year-end, manifesting itself in soaring unsecured funding rates such as the overnight repo hitting 33% as noted yesterday, paralyzing both the overnight…
and longer-dated interbank lending markets…
… January may bring scant relief as lenders prepare for stronger cash demand before Lunar New Year holidays, which are only a month away.
The narrative is familiar: China’s markets are seeing renewed pressure this month as the Federal Reserve projects a faster pace of rate increases for 2017 and its Chinese counterpart tightens monetary conditions to spur deleveraging and defend the exchange rate. The declines are capping off a tough year for investors during which bonds, shares and currency all slumped, with the last hitting all time lows, just as Kyle Bass had predicted roughly one year ago.
Much of the blame is on the unique calendar this year: “You have Chinese New Year quite early, and because of that one-month window, most of the banks will try to lock the money in a three-month cycle,” said Arthur Lau, Hong Kong-based head of Asia ex-Japan fixed income at PineBridge Investments. “The current situation in the bond market is partly because of year-end and because of Chinese New Year.”
But two far bigger culprits are the tightening Fed, and the rapidly deteriorating standoff between China’s housing bubble, which Beijing desperately wants to deflate into a soft landing by withdrawing liquidity, and China’s banking system which in turn is desperate for more liquidity, more easing, or at least a reduction in required reserves.
Meanwhile, the local debt market is flashing red warning lights, yet most market participants seem to be blissfully ignoring them: China’s 10-year government bond yield has surged 21 basis points in December, poised for its biggest monthly increase since August 2013, when the local banks nearly collapsed as a result of a failed deleveraging effort. The yuan’s 6.6 percent decline in 2016 puts it on course for its worst year since 1994, while the Shanghai Composite Index is headed for its largest drop in five years. The three-month interbank rate known as Shibor rose for a 50th day, its longest streak since 2010, to an 18-month high on Wednesday. The overnight repurchase rate on the Shanghai Stock Exchange jumped to as high as 33 percent the day before, the highest since Sept. 29. As banks become more reluctant to offer cash to other types of institutions, the latter have to turn to the exchange for money, said Xu Hanfei, an analyst at Guotai Junan Securities Co. in Shanghai.
But the worst news for China is that the local population is well-aware of the financial problems facing Beijing, and has been scrambling to transfer its cash offshore. As Bloomberg notes, the recent surge in onshore yuan trading volume suggests outflows are quickening, according to Harrison Hu, chief greater China economist at Royal Bank of Scotland. The daily average value of transactions in Shanghai climbed to $34 billion in December as of Wednesday, the highest since at least April 2014, according to data from China Foreign Exchange Trade System.
Which brings us to the January 1 clock reset, and the imminent surge in perfectly legal capital outflows.
“In the new year, the new foreign-exchange purchase quota starts, so we expect yuan positions in January to drop significantly,” Liu Dongliang, an analyst at China Merchants Bank Co., wrote in a note this month. “Within the foreseeable future, the market will be pessimistic about funding conditions. It happens to be near year-end now, where money markets are tight, and after New Year’s Day it’s almost Chinese New Year.”
Ultimately, trying to keep a lid on the Yuan is a game China will lose, and some are already preemptively admitting defeat. Among them is Yu Yongding, a former academic member of the PBOC’s monetary policy committee, who overnight urged his former PBOC colleagues to engage the “nuclear option” – a sharp, one off devaluation similar to what China did in August of 2015.
In emailed comments to Bloomberg, Yongding said that China has a window from now to President-elect Donald Trump’s inauguration to halt FX intervention and let yuan depreciate to its equilibrium level.
Yongding believes that once FX reserves fall below a certain psychological threshold, capital outflows will only accelerate, and while depreciation expectations may weaken occasionally, they will never disappear until the yuan free floats and finds its equilibrium.
He also warned that concerns over depreciation have severely affected the PBOC’s monetary-policy independence and said that while tightening capital controls is right move, this has massive side effects and can be evaded.
His conclusion: letting yuan fall won’t be as scary as some imagine because Chinese companies have been paying down their FX debt and a large drop isn’t supported by nation’s economic fundamentals.
Will the PBOC stun everyone and unveil a surprise devaluation in the next three weeks? We don’t know, but according to bitcoin, which has soared by 20% in just the past week, someone does appear to “know” something, and if they are right, a devaluation is precisely what the Chinese central bank has in store.
- Contagion Concerns Slam Japanese Financials As Toshiba Crashes 50% In 3 Days
After two days of total carnage in Toshiba stocks, bonds, and credit risk, the bloodbath continues with the once-massive Japanese company is collapsing once again in early trading – now down 50% in 3 days. Following the semiconductor and nuclear business catastrophes, the company had nothing to add regarding today's crash but more worryingly the massive loss of market cap is spreading contagiously to Japanese financials with Sumi down 4%, and MUFG down almost 3%.
As we noted yesterday, Tsunukawa said that “I apologize to shareholders, business partners and all stakeholders for the trouble we have caused,” after Toshiba said cost overruns at U.S. nuclear reactors it is building were likely to force a write-down of as much as several billion dollars, clouding its turnaround plan after the 2015 accounting scandal. Specifically, the company said it may have to book several billion dollars in charges related to a U.S. nuclear power plant construction company acquisition, rekindling "concerns about its accounting acumen."
The problem is that the nuclear business, together with the semiconductors, has been positioned as one of key pillars underpinning Toshiba's growth which has been trying to shift away from its consumer electronics core. Alas, the latest gaffe now means that much of Toshiba's growth is gone, and the stock price reflect that overnight, when Toshiba's stock plunged by 20%, the most permitted, before it was halted for trading.
The derisking is weighing heavily on USDJPY…
And now, as Bloomberg reports, Japanese financials are tumbling on cross-default, contagion concerns…
Sumitomo Mitsui Trust Bank has highest capital exposure to Toshiba, with loans equaling 5.5% of the bank’s equity, analyst Shinichiro Nakamura writes in report.
SMTB would also suffer greatest earnings hit, with a Toshiba impairment charge of 100b-190b yen shaving ~9.9% off bank’s current profit for fiscal year to March 31: SMBC Nikko ests.
If Toshiba impairment charge reaches over 400b yen, banks may conduct debt/equity swap; would lower near-term earnings impact while carrying risk of preferred shares losing value
In 3rd scenario, Toshiba could undertake private placement with strategic partner; major banks would be limited to funding support but could be asked to waive claims
Sumitomo Mitsui Trust shares fall as much as 4%, MUFG -2.6%, Mizuho -2.4%, SMFG -2.4%
- Bankruptcy Asset Hunters Confirm What Most Of Us Already Knew: Everyone Lies On Social Media
Earlier this year Curtis Jackson III (aka “50 Cent”) raised some concerns with his bankruptcy judge, Ann Nevins, after he posted a couple of ill-advised pictures on Instragram of himself posing with $100,000s of dollars worth of cash. Apparently Chapter 7 trustees frown upon omitting “buckets of cash” from your official bankruptcy disclosures and then subsequently posing with that cash on social media. But, after being ordered to appear in court to explain the pictures, an embarrassed 50 Cent was forced to admit that the cash was fake.
As the Wall Street Journal points out, chapter 7 trustees all around the country are finding out that “fiddy” isn’t the bankrupt person “frontin” on social media.
This October, when Ido Alexander saw photos a young man had posted on social media, he thought he had hit the bankruptcy jackpot.
Mr. Alexander, a Florida lawyer working for a court-appointed trustee, dispatched an appraiser to the man’s home to inspect the expensive-looking gold chains and other jewelry he had been posing in, which he hadn’t declared as assets in court filings.
The appraiser made another discovery that is becoming all too common in the age of social-media braggadocio. “At the end of the day, it was really costume jewelry,” Mr. Alexander says. “It was really disappointing.”
The industry’s detectives—lawyers and accountants who serve as chapter 7 bankruptcy trustees—are learning what most teenagers have already figured out, which is that you can’t always believe what you see on Facebook and Twitter. “Gotcha” moments in which they discover people in bankruptcy posing in glamorous-looking jewelry, piloting boats and ATVs and even displaying buckets full of cash have fallen flat as the items turn out to be fake, or not theirs at all.
Of course, some people are dumb enough to actually hide real assets from the bankruptcy court which rarely works out all that well. Just ask Gregory Sipe of Virginia who decided to omit nearly $1 million worth of vintage guitars from his asset disclosures and earned himself five months of house arrest and nice little fine to boot.
Trustees say efforts to hide assets don’t happen often, but nevertheless have been going on for years. An Oklahoma man who filed for bankruptcy in 2005 failed to turn over profits from his ownership stake in a television show, the court ruled. The name of the show: “Cheaters.”
Tipped off by a creditor, North Carolina bankruptcy trustee John Bircher III, ran an online search on a Chesapeake, Va., businessman and found a newspaper article about his collection of 250 guitars. The man, Gregory Sipe, had only listed “several collectible guitars” worth $10,000 in his August 2010 bankruptcy filing.
When Mr. Bircher paid Mr. Sipe a visit, he recalls, he discovered a garage full of vintage guitars that later sold for almost $900,000. Lawyer Raymond Tarlton, who represented Mr. Sipe, said his client didn’t disclose the guitars because he thought he could fully pay his debts without selling them.
Mr. Sipe pleaded guilty, was sentenced to five months of house arrest and had to pay $5,900 for falsifying court records.
Who knew that people sensationalize their lives on social media? We thought we were the last remaining miserable people on the planet…this is a good news day.
- Is 100% Of "US Warming" Due To NOAA Data Tampering?
Climate Central just ran this piece, which the Washington Post picked up on. They claimed the US was “overwhelmingly hot” in 2016, and temperatures have risen 1,5°F since the 19th century.
The first problem with their analysis is that the US had very little hot weather in 2016. The percentage of hot days was below average, and ranked 80th since 1895. Only 4.4% of days were over 95°F, compared with the long term average of 4.9%. Climate Central is conflating mild temperatures with hot ones.
They also claim US temperatures rose 1.5°F since the 19th century, which is what NOAA shows.
The problem with the NOAA graph is that it is fake data. NOAA creates the warming trend by altering the data. The NOAA raw data shows no warming over the past century
The adjustments being made are almost exactly 1.5°F, which is the claimed warming in the article.
The adjustments correlate almost perfectly with atmospheric CO2. NOAA is adjusting the data to match global warming theory. This is known as PBEM (Policy Based Evidence Making.)
The hockey stick of adjustments since 1970 is due almost entirely to NOAA fabricating missing station data. In 2016, more than 42% of their monthly station data was missing, so they simply made it up. This is easy to identify because they mark fabricated temperatures with an “E” in their database.
When presented with my claims of fraud, NOAA typically tries to arm wave it away with these two complaints.
- They use gridded data and I am using un-gridded data.
- They “have to” adjust the data because of Time Of Observation Bias and station moves.
Both claims are easily debunked. The only effect that gridding has is to lower temperatures slightly. The trend of gridded data is almost identical to the trend of un-gridded data.
Time of Observation Bias (TOBS) is a real problem, but is very small. TOBS is based on the idea that if you reset a min/max thermometer too close to the afternoon maximum, you will double count warm temperatures (and vice-versa if thermometer is reset in the morning.) Their claim is that during the hot 1930’s most stations reset their thermometers in the afternoon.
This is easy to test by using only the stations which did not reset their thermometers in the afternoon during the 1930’s. The pattern is almost identical to that of all stations. No warming over the past century. Note that the graph below tends to show too much warming due to morning TOBS.
NOAA’s own documents show that the TOBS adjustment is small (0.3°F) and goes flat after 1990.
Gavin Schmidt at NASA explains very clearly why the US temperature record does not need to be adjusted.
You could throw out 50 percent of the station data or more, and you’d get basically the same answers.
One recent innovation is the set up of a climate reference network alongside the current stations so that they can look for potentially serious issues at the large scale – and they haven’t found any yet.
NOAA has always known that the US is not warming.
All of the claims in the Climate Central article are bogus. The US is not warming and 2016 was not a hot year in the US. It was a very mild year.
- It's The Dollar, Stupid!
We think the markets have it fundamentally wrong. US investors are anticipating a cyclical shift towards economic expansion via new tax incentives, business de-regulation and Keynesian government spending that promise to increase output, demand and asset prices. However, there is a far more influential driver of future asset prices – a structural shift that has begun but has yet to be acknowledged by economic and political authorities, and, judging by financial asset markets, by most investors. We expect weak equity markets and a strong treasury market beginning in 2017.
It’s the Dollar, Stupid.
The financial model used by advanced economies since 1971 is quickly losing its ability to support economic growth and rising asset prices.1 Western economic policy, which had previously relied heavily on credit creation from 1971 to 2008, was replaced in 2009 by monetary policy that relied heavily on base money creation through asset purchases. The structural shift in central bank focus from credit to monetary creation marked a paradigm shift in the decades-long finance-based economic model – from the leveraging phase to the de-leveraging phase.
The Fed shifted to relying on a communications policy in 2013, which focused on renewing the broad perception that by “normalizing” US interest rates the economy would again begin to react to credit incentives it could manage. It also emphasized the need for fiscal stimulus, which would ostensibly create demand and stimulate production growth. Last month the Fed hiked overnight rates for the second time in two years and the markets expect it to hike rate three times in 2017.
Fed rate hikes tighten credit conditions in the US and, given the continued execution of QE by other major global central banks, increase the exchange value of the dollar. A stronger dollar theoretically increases other economies’ exports into the US, provided that US consumers and businesses are able to maintain the same level of demand for foreign goods and services. This is an open question.
Donald Trump’s election raised hope that new tax incentives, business de-regulation and Keynesian government spending will create sufficient demand. The dollar and US financial markets have reacted in sympathy with stock prices rising and bond prices falling…despite the Fed’s renewed credit tightening. A strong dollar would tend to attract global wealth to the US, wealth that theoretically could find its way into US risk assets including US equities. Thus, US equity strength since the election reflects a strong dollar, which is based on the combination of Fed rate hikes and renewed hope for US government stimulus.
This is not the first time the Fed has had to actively increase the exchange value of the dollar. Paul Volcker’s Fed had to hike overnight rates to 20% in 1980-81 so the dollar would be reaffirmed as a store of global value for US trading partners, including OPEC. We believe the Fed is doing the same today, in spite of its de-stimulative impact, because it wants to attract global capital to US banks and asset markets. Doing so would ensure USD hegemony, which would be necessary if/when global leverage leads to hyperinflation and multilateral trade and currency wars. Once substantial wealth is held in dollars and dollar-denominated assets, the US political dimension and the Fed, through the BIS and IMF, would be able to control the terms of a global monetary reset, which in turn would de-leverage balance sheets across currencies and economies in a controlled manner; in effect, a pre-packaged bankruptcy in real terms.
Nothing has changed structurally (or cyclically) since the US election. Global central banks are de-leveraging their banks through QE, with the exception of the Fed, which already did. Commercial bank liquidity and solvency is a precondition for a global monetary reset. The table is being set for more, not less, central bank intervention in the form of monetary inflation, and more intervention from the political dimension, which would choose which non-bank creditors (and debtors) will experience credit deflation.
The markets have it wrong
We believe fiscal measures like those being speculated about now in the US, even if successfully executed, would fail to generate meaningful new production and demand within the US and global economies. Financial markets are vulnerable to a reversal of their recent trends.
We cannot place specific figures or exact times when benchmark equity and fixed-income indexes will reverse current trends; however, we are increasingly confident that US and global economies have begun to experience necessary structural changes that directly impact: 1) incentives to produce and consume, 2) the fundamental manner in which the political dimension approaches monetary and fiscal policies, and 3) the way in which investors think about assets, liabilities, economics and capital markets.
The secular US fixed income bull market, which began in 1981 when the Fed embarked on what would become a forty five-year credit easing regime that benefitted, treasury, mortgage, corporate, municipal, small enterprise and consumer borrowers, and would eventually spread globally to other advanced and emerging bond markets; which allowed the US government to deficit-spend (eventually without the expectation of recourse) its way to unrivaled military might that defeated and then contained potential hostile threats abroad; which provided primary funding for bank and shadow bank lending that gave the US dollar and financial markets status as the ultimate sanctuary of global wealth; which provided a platform on which global bank and non-bank counterparties could swap contingent liabilities amounting to many times the size of underlying cash markets without fear of regulatory interference; and which provided speculators across other asset markets (including real estate) to continually sponsor unsustainable valuations, no longer produces capital or serves an economic purpose, and is almost over.
The secular US equity bull market, which not coincidentally also began in 1981 and served as the principal funding mechanism for great advances in digital technologies, communications, finance, logistics, health care, energy, retail, and other industries; which helped raise and maintain competitive trade advantages for the US and its allies; which expanded capital expenditures, productive output and consumer demand; which helped collateralize expansive public and private credit issuance and debt assumption, in turn creating a positive feedback loop that further increased nominal production, consumption and asset prices, and which created nominal wealth for US and non-US asset holders, is also in its evanescence.
Stock and bond markets in advanced, financially-oriented economies, have devolved more into political imperatives necessary to maintain social services and the perception of wealth, rather than serving as the traditional means to build and price wealth and capital. They no longer serve societies or global trade.
In over-leveraged economies, stock and bond markets become co-dependent. To sustain market prices, debt and equity require nominal output growth. To sustain market values, they require real output growth. The only way to increase nominal output growth and raise nominal equity prices in a highly leveraged economy with leveraged currency is to raise the quantity of credit, which must eventually reduce real output and asset values. The question before us is whether “eventually” is occurring now.
The primary reason we think stocks are peaking is scale. Aggregate market caps, valuations, revenues and earnings of public companies cannot be sustained by the level of real production in the underlying US and global economy. We think bonds are on the eve of reconciliation for the same basic reason: the scale of systemic leverage has already begun to reduce incentives to expand credit for capital formation, which, in turn, promotes debt deflation.
We expect debt deflation coincident with central bank monetary inflation, which would offset the deflation…on paper (like feet in the oven, head in the freezer producing a reasonable average). Before this occurs, we expect a financial or economic event that focuses public attention on the leverage problem.
The incentive to invest in the stock market is to build wealth, which is accomplished by generating positive real (inflation-adjusted) returns. This presents a problem looking forward. Many of the companies the market rewards most in terms of market cap drive goods and service prices lower by innovating and connecting buyers and sellers (e.g. Amazon, Facebook).
Against this backdrop, the Fed’s economic mandate from Congress is to work towards stable prices and full employment. To do so, it has a specific annual inflation target of 2%. If the Fed is successful in this target, then it will reduce the purchasing power of US dollars by more than 64% over the next 25 years:
As the table above makes clear, through its specific economic mandates and acceptance of the Fed’s 2% inflation target, the US Congress effectively promotes a decline in the value of ongoing savings earned and amassed by American labor. For investors, the policy also acts as a hurdle over which investor returns must rise to create positive real returns (i.e., wealth).
On one hand, commercial competition is naturally driving prices lower, making goods and services more economical for producers and consumers, and equity markets are inflating the asset values of businesses that deflate prices. On the other hand, the Fed is trying to drive goods, services and asset prices higher, which would drive the purchasing power value of savings lower.
Since 1998, asset prices (portrayed by the Wilshire 5000 on the graph above) have been supported in great part by Fed liquidity and debt-driven buybacks while US economic activity, (portrayed by monetary velocity), has been in secular decline. It is tough to sustain 2% inflation for very long through financial maneuverings when domestic economic activity continues to weaken. Any further inflation the Fed might help create (as it hikes rates!?) will not be demand driven, but rather the result of more financial leverage.
It can’t persist much longer
The current excitement among US equity and credit investors over the promise of a best-case stimulative mix of deregulation, tax cuts, and Keynesian government spending has created a very optimistic market tone. The Fed has further intimated December’s rate hike was the start of a new regime of interest rate normalization. Together, these dynamics have caused treasury yields across the curve to rise. Rising treasury yields in past business cycles have further signaled economic recovery, which has seemed to confirm to most investors that economic and equity market optimism are warranted. We disagree.
Any fear of demand-driven goods and service inflation is un-warranted given 1) the already-leveraged nature of public and private sector balance sheets, 2) the need to perpetuate the relative strength of the dollar, and 3) the expectation of further Fed rate hikes. Even a successful multi-trillion dollar US government spending program that provides a few jobs and necessary American capital improvements could not provide sufficient consumer demand to overcome US and global balance sheet leverage and the attendant necessity to maintain US dollar strength to sustain the current monetary system.
The graph below plots the secular decline in long-duration treasuries against the year-over-year rate of US goods and service inflation. (The gap in 30-year treasuries is due to the elimination of Long Bond issuance from August 2001 to February 2006.) We believe the rise at the extreme right of the graph representing their most recent trends is not indicative of the next big move for long-duration treasuries.
Given the need to maintain the US dollar as the fulcrum of the US monetary system, the most influential input for future treasury yields has become global output, which is in secular decline. This trend is logical, established and seems to be accelerating. It is logical because the secular post-War decline in global output growth was only interrupted by the emergence over the least twenty years of large new economies like the BRICs. The continuation of that secular downward trend would make sense once those emerging economies are established. The graphs below confirm that balance sheet leverage within emerging economies have surpassed those in developed economies and that, not surprisingly, global output growth is truly struggling. As a result, we expect one last spasm that takes long-term treasury yields to new lows.
Relevant Economics for Equity Investors
Investors will soon be forced to better understand the macro world around them. The perception of the deflation/inflation metric should determine near term and secular debt and equity market directions.
Prices are determined by supply/demand equilibriums – where the supply of goods, services, labor and assets meets the demand for each. This is theoretically true in classical economics. However, in the current flexible exchange rate monetary system administered by banking systems and the political dimension (i.e., a fiat regime), both supply and demand are determined by the prevailing quantity of credit available to producers of supply and the quantity of credit available to consumers who create demand. (Credit is simply a claim on base money, which is created by central banks.)
The most insipid structural problem threatening economic vitality and equity market returns is public and private sector leverage. High and rising debt-to-GDP ratios, which threaten economic liquidity, and high and rising debt-to-base money ratios, which threaten balance sheet solvency, must eventually be reconciled. Aging demographics within the world’s largest economies is accelerating the timing of the necessary reconciliation, which must occur through debt deflation, monetary inflation, or both.
Thus, investors seeking to create wealth by investing in broad equity markets face a fundamental structural problem caused by the irreconcilability of 1) naturally occurring commercial deflation, 2) economies and political systems that rely on inflation, and 3) the crowding out of consumption and investment by necessary debt service.
Consider the 2% inflation target established by the Fed and accepted by most political economists. See table, page 4.) The target ostensibly limits the annual loss of purchasing power to 2%, and therefore it is generally thought that having such a target is in the best interest of American workers. Such an argument is inaccurate, naïve and disingenuous. As the graph on the previous page shows, the Fed was unable to cap goods and service inflation when energy prices spiked from limited supply in the 1970s, and unable to cap inflation at 2% throughout the credit-led secular bull market in corporate and property equity in the 1980s, 1990s and 2000s.
Goods and service inflation more recently has struggled to rise to 1.7%, where it stands today. A 2% inflation target has shifted from a target to preserve the purchasing power of the dollar to a target to ruin it. Nowhere in the public discussion has this been mentioned. As discussed above, we think the Fed’s “fear of inflation”, which is ostensibly driving the new rate hike regime, is a necessary public narrative that will let the Fed pursue its true objective – a stronger dollar and deflation amid a contracting real economy.
Even if US domestic economic activity were to somehow reverse its secular downtrend enough to warrant current equity valuations, it is difficult to conceive how much more asset prices could rise – especially in real terms. Simple math, anachronistic economic policies and poor demographics pose insurmountable barriers for creating wealth through public share ownership. (We further discussed the current negative implications of over-valuation and the negatively convex nature of equity markets in The Grift.)
Can the Establishment really be that wrong?
In classic economics, both employment and inflation are derived from production. Political economists, a moniker that defines the academic discipline from which the great majority of contemporary economists spring, argue that a fully-employed labor force suggests that rising labor inflation will lead to rising goods and service inflation. Thus, the Fed is trying to raise rates currently, citing the second Fed mandate – full employment – which threatens stable prices. The ultimate policy goal is to protect the US (and global) economy from shrinking.
According to logic and classic economics, there is nothing wrong with a shrinking economy. Why? Because an economy should shrink commensurate with a rise in leisure time. Seriously. An economy is theoretically supposed to serve its factors of production. The more economical it is, the more leisure time it produces for its participants. (We suspect economies are called “economies” because they were formed naturally as systems that actually economized.)
In such an economy, only theoretical today, deflation would be a good thing because it would increase the purchasing power value of savings produced from past labor. In fact, an increase in deflation (i.e., an increase in declining prices) would actually raise real (inflation-adjusted) GDP because the gain in the dollar’s purchasing power from deflation would offset the declining volume of goods and services (nominal GDP). (We suspect this fundamental economic truth is the reason Congress’s mandate to the Fed includes only stable prices and employment, and not economic growth.)
The graph below shows the decline in the American work force since 2000. It should not strike you as alarming, given 1) all the great new innovations and technologies replacing human capital and 2) the expansion of global human capital from emerging economies. Tell us again, we ask sarcastically, what “full employment” is?
Market cap-weighted indexes notwithstanding, it may be worthwhile here to ask yourself again why an increase in the majority of US equity shares is generally perceived as a given as the US economy becomes more efficient.
Why it is all about the Dollar Now?
In today’s global monetary system, currencies are tranched liabilities of: 1) commercial banks that create deposits through the lending process; 2) central banks on the hook to collateralize member commercial banks that create deposits and credit without commensurate reserves or circulated currency (base money), and; 3) treasury ministries that ask constituent factors of production to have faith that its taxing authority and, as has been demonstrated throughout history, its ability to wage war to loot enough resources outside its taxing domain to protect its currency’s purchasing power value.
As liabilities without directly-linked offsetting assets, the purchasing power value of currencies are always susceptible to dilution. Dilution comes in the form of credit issued by banks (and, potentially, non-bank lenders) that is either not collateralized by assets or collateralized by assets that themselves are liabilities (like Treasury notes). The wider the gap separating the amount of un-collateralized credit denominated in a currency from that currency’s base money (bank reserves and currency in float) – the ratio that determines monetary leverage – the greater the amount of future monetary de-leveraging will have to occur. (De-leveraging must ultimately occur so that debtors can service or repay their obligations and so producers have incentive to continue to supply goods and services in exchange for that currency.)
We expect global monetary authorities to protect the dollar as long as they can and we expect them to fail. Stocks and bonds will react violently; stocks and weak credits falling, treasuries prices rising (at first). That failure will lead to hyperinflation – not driven by demand, but rather by central bank money printing. A new global monetary understanding will then emerge.
We expect weak equities and a strong treasury market in 2017, as they begin to discount this fundamental structural shift.
Digest powered by RSS Digest