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Jan 04

Today’s News 4th January 2017

  • The Titanic Sails At Dawn: Warning Signs Point To Danger Ahead In 2017

    Submitted by John Whitehead via The Rutherford Institute,

    “When did the future switch from being a promise to being a threat?” ? Chuck Palahniuk, Invisible Monsters

    Despite our best efforts, we in the American police state seem to be stuck on repeat, reliving the same set of circumstances over and over and over again: egregious surveillance, strip searches, police shootings of unarmed citizens, government spying, censorship, retaliatory arrests, the criminalization of lawful activities, warmongering, indefinite detentions, SWAT team raids, asset forfeiture, etc.

    Unfortunately, as a nation we’ve become so desensitized to the government’s acts of violence, so accustomed to reports of government corruption, and so anesthetized to the sights and sounds of Corporate America marching in lockstep with the police state that few seem to pay heed to the warning signs blaring out the message: Danger Ahead.

    Remember, the Titanic received at least four warnings from other ships about the presence of icebergs in its path, with the last warning issued an hour before disaster struck. All four warnings were ignored.

    Like the Titanic, we’re plowing full steam ahead into a future riddled with hidden and not-so-hidden dangers. We too have been given ample warnings, only to have them drowned out by a carefully choreographed cacophony of political noise, cultural distractions and entertainment news—what the Romans termed “bread and circuses”—aimed at keeping the American people polarized, pacified and easily manipulated.

    However, there is still danger ahead. The peril to our republic remains the same.

    As long as a permanent, unelected bureaucracy—a.k.a. the shadow government— continues to call the shots in the halls of power and the reach of the police state continues to expand, the crisis has not been averted.

    Here’s a glimpse of some of the nefarious government programs we’ll be encountering on our journey through the treacherous waters of 2017.

    Mandatory quarantines without due process or informed consent: Under a new rule proposed by the Centers for Disease Control and Prevention, government agents will be empowered to indefinitely detain any traveler they suspect of posing a medical risk to others without providing an explanation, subject them to medical tests without their consent, and carry out such detentions and quarantines without any kind of due process or judicial review.

     

    Mental health assessments by non-medical personnel: As a result of a nationwide push to train a broad spectrum of so-called gatekeepers such as pastors, teachers, hair stylists, bartenders, police officers and EMTs in mental health first-aid training, more Americans are going to run the risk of being reported by non-medical personnel and detained for having mental health issues.

     

    Tracking chips for citizens: Momentum is building for the government to be able to track citizens, whether through the use of RFID chips embedded in a national ID card or through microscopic chips embedded in one’s skin. In December 2016, the House of Representatives overwhelmingly approved legislation allowing police to track individuals suffering from some form of mental disability such as Alzheimer’s or autism by way of implanted chips.

     

    Military training to deal with anti-establishment movements in megacities: The future, according to a Pentagon training video, will be militaristic, dystopian and far from friendly to freedom. Indeed, if this government propaganda-piece that is being used to train special forces is to be believed, the only thing that can save the world from outright anarchy—in the eyes of the government, at least—is the military working in conjunction with local police. The video confirms what I’ve been warning about for so long: in the eyes of the U.S. government and its henchmen, the battlefield of the future is the American home front.

     

    Government censorship of anything it classifies as disinformation: This year’s National Defense Authorization Act, which allocates $619 billion for war and military spending, not only allows the military to indefinitely detain American citizens by placing them beyond the reach of the Constitution, but it also directs the State Department to establish a national anti-propaganda center to “counter disinformation and propaganda.” Translation: the government plans to crack down on anyone attempting to exercise their First Amendment rights by exposing government wrongdoing, while persisting in peddling its own brand of fake news.

     

    Threat assessments: Government agents—with the help of automated eyes and ears, a growing arsenal of high-tech software, hardware and techniques, government propaganda urging Americans to turn into spies and snitches, as well as social media and behavior sensing software—are spinning a sticky spider-web of threat assessments, behavioral sensing warnings, flagged “words,” and “suspicious” activity reports aimed at snaring potential enemies of the state. It’s the American police state rolled up into one oppressive pre-crime and pre-thought crime package.

     

    War on cash: The government and its corporate partners are engaged in 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. As economist Steve Forbes concludes, “The real reason for this war on cash—start with the big bills and then work your way down—is an ugly power grab by Big Government. People will have less privacy: Electronic commerce makes it easier for Big Brother to see what we’re doing, thereby making it simpler to bar activities it doesn’t like, such as purchasing salt, sugar, big bottles of soda and Big Macs.”

     

    Expansive surveillance: Whether you’re walking through a store, driving your car, checking email, or talking to friends and family on the phone, you can be sure that some government agency, whether the NSA or some other entity, will still be listening in and tracking your behavior. This doesn’t even begin to touch on the corporate trackers who work with the government to monitor your purchases, web browsing, Facebook posts and other activities taking place in the cyber sphere. In such an environment, we are all suspects to be spied on, searched, scanned, frisked, monitored, tracked and treated as if we’re potentially guilty of some wrongdoing or other.

     

    Militarized police: Americans are finding their once-peaceful communities transformed into military outposts, complete with tanks, weaponry, and other equipment designed for the battlefield. Now, the Department of Homeland Security, the Justice Department and the FBI are preparing to turn the nation’s police officers into techno-warriors, complete with iris scanners, body scanners, thermal imaging Doppler radar devices, facial recognition programs, license plate readers, cell phone extraction software, Stingray devices and so much more.

     

    Police shootings of unarmed citizens: Owing in large part to the militarization of local law enforcement agencies, not a week goes by without more reports of hair-raising incidents by police imbued with a take-no-prisoners attitude and a battlefield approach to the communities in which they serve. Indeed, as a special report by The Washington Post reveals, despite heightened awareness of police misconduct, the number of fatal shootings by officers in 2016 remained virtually unchanged from the year before.

     

    False flags and terrorist attacks: Despite the government’s endless propaganda about the threat of terrorism, statistics show that you are 17,600 times more likely to die from heart disease than from a terrorist attack. You are 11,000 times more likely to die from an airplane accident than from a terrorist plot involving an airplane. You are 1,048 times more likely to die from a car accident than a terrorist attack. You are 404 times more likely to die in a fall than from a terrorist attack. And you are 8 times more likely to be killed by a police officer than by a terrorist.

     

    Endless wars to keep America’s military’s empire employed: The military industrial complex that has advocated that the U.S. remain at war, year after year, is the very entity that will continue to profit the most from America’s expanding military empire. The U.S. Department of Defense is the world’s largest employer, with more than 3.2 million employees. Thus far, the U.S. taxpayer has been made to shell out more than $1.6 trillion to wage wars in Afghanistan and Iraq. When you add in military efforts in Pakistan, as well as the lifetime price of health care for disabled veterans and interest on the national debt, that cost rises to $4.4 trillion.

     

    Attempts by the government to identify, target and punish so-called domestic “extremists”: The government’s anti-extremism program will, in many cases, be utilized to render otherwise lawful, nonviolent activities as potentially extremist. To this end, police will identify, monitor and deter individuals who exhibit, express or engage in anything that could be construed as extremist before they can become actual threats. This is pre-crime on an ideological scale.

     

    SWAT team raids: More than 80% of American communities have their own SWAT teams, with more than 80,000 of these paramilitary raids are carried out every year. That translates to more than 200 SWAT team raids every day in which police crash through doors, damage private property, kill citizens, terrorize adults and children alike, kill family pets, assault or shoot anyone that is perceived as threatening—and most often in the pursuit of someone merely suspected of a crime, usually some small amount of drugs.

     

    Erosions of private property: Private property means little at a time when SWAT teams and other government agents can invade your home, break down your doors, kill your dog, wound or kill you, damage your furnishings and terrorize your family. Likewise, if government officials can fine and arrest you for growing vegetables in your front yard, praying with friends in your living room, installing solar panels on your roof, and raising chickens in your backyard, you’re no longer the owner of your property.

     

    Overcriminalization: The government’s tendency towards militarization and overcriminalization, in which routine, everyday behaviors become targets of regulation and prohibition, has resulted in Americans getting arrested for making and selling unpasteurized goat cheese, cultivating certain types of orchids, feeding a whale, holding Bible studies in their homes, and picking their kids up from school.

     

    Strip searches and the denigration of bodily integrity: Court rulings undermining the Fourth Amendment and justifying invasive strip searches have left us powerless against police empowered to forcefully draw our blood, forcibly take our DNA, strip search us, and probe us intimately. Accounts are on the rise of individuals—men and women alike—being subjected to what is essentially government-sanctioned rape by police in the course of “routine” traffic stops.

     

    Drones: As corporations and government agencies alike prepare for their part in the coming drone invasion—it is expected that at least 30,000 drones will occupy U.S. airspace by 2020, ushering in a $30 billion per year industry—it won’t be long before American citizens find themselves to be the target of these devices. Drones—unmanned aerial vehicles—will come in all shapes and sizes, from nano-sized drones as small as a grain of sand that can do everything from conducting surveillance to detonating explosive charges, to middle-sized copter drones that can deliver pizzas to massive “hunter/killer” Predator warships that unleash firepower from on high.

     

    Prisons: America’s prisons, housing the largest number of inmates in the world and still growing, have become money-making enterprises for private corporations that manage the prisons in exchange for the states agreeing to maintain a 90% occupancy rate for at least 20 years. And how do you keep the prisons full? By passing laws aimed at increasing the prison population, including the imposition of life sentences on people who commit minor or nonviolent crimes such as siphoning gasoline.

     

    Censorship: First Amendment activities are being pummeled, punched, kicked, choked, chained and generally gagged all across the country. Free speech zones, bubble zones, trespass zones, anti-bullying legislation, zero tolerance policies, hate crime laws and a host of other legalistic maladies dreamed up by politicians and prosecutors have conspired to corrode our core freedoms. The reasons for such censorship vary widely from political correctness, safety concerns and bullying to national security and hate crimes but the end result remains the same: the complete eradication of what Benjamin Franklin referred to as the “principal pillar of a free government.”

     

    Fascism: As a Princeton University survey indicates, our elected officials, especially those in the nation’s capital, represent the interests of the rich and powerful rather than the average citizen. We are no longer a representative republic. With Big Business and Big Government having fused into a corporate state, the president and his state counterparts—the governors—have become little more than CEOs of the Corporate State, which day by day is assuming more government control over our lives. Never before have average Americans had so little say in the workings of their government and even less access to their so-called representatives.

    James Madison, the father of the Constitution, put it best when he warned: “Take alarm at the first experiment with liberties.” Anyone with even a casual knowledge about current events knows that the first experiment on our freedoms happened long ago.

    We are fast moving past the point of no return when it comes to restoring our freedoms. Worse, as I make clear in my book Battlefield America: The War on the American People, we can barely see the old America with its revolutionary principles and value for independence in the rear view mirror. The only reality emerging generations will know is the one constructed for them by the powers-that-be, and you can rest assured that it will not be a reality that favors individuality, liberty or anything or anyone who challenges the status quo.

    As a senior advisor to George W. Bush observed, We’re an empire now, and when we act, we create our own reality. And while you’re studying that reality—judiciously, as you will—we’ll act again, creating other new realities, which you can study too, and that’s how things will sort out. We’re history’s actors . . . and you, all of you, will be left to just study what we do.”

    In other words, the government has been operating ten steps ahead for quite some time now, and we have yet to catch up, let alone catch our breath as the tides of change swirl around us.

    You’d better tighten your seatbelts, folks, because we could be in for a rough ride in 2017.

  • Morgan Stanley Warns to Sell the Inauguration While Greatly Increasing 2018 Earnings Forecast

    Morgan Stanley is out with a helter skelter note of caution on markets, warning investors to sell the Trump inauguration while upping earnings estimates by 18% for 2018 — citing material upside in earnings and multiple contraction.
     
    Plainly, if what Morgan Stanley says comes to fruition, stocks should trade higher on the backs of buybacks, fiscal stimulus, and big corporate tax cuts. However, the sages at Morgan are worried about the recent scale of the rally, coupled with Fed hike fever risks, European uncertainty and of course a rising dollar.
     
    They see no near term catalyst to drive shares after the inauguration and suggest investors start to think about getting out.

    U.S. stocks have rallied since the election, but it’s time for investors to start thinking about getting out, possibly timed for President-elect Donald Trump’s inauguration, Morgan Stanley said.
     
    “We are worried that there is arrogance in telling people that they should be worried, but to stay bullish for now,” Morgan Stanley said in a note dated Tuesday.
     
    “Part of us thinks we should just sell the inauguration. After all, what incrementally positive and exciting outcomes could be produced in the first few weeks after that?”
     
    “To us, it is WHEN, not IF we should fade this recent reflation trade,” it said.
     
    Morgan Stanley set its base-case target for the S&P 500 at 2300 at end-2017, marking 16.2 times its 2018 earnings forecast, compared with Tuesday’s close at 2257.83.
     
    “We can’t help but think that the Republican sweep has created a more uncertain and volatile outlook for the economy and corporate earnings growth,” it said, citing risks from a more hawkish Federal Reserve, China’s economic slowdown, a much stronger dollar and European political uncertainty.
     
    Morgan Stanley said there was clearly a lot of earnings uncertainty ahead, but it still forecast that the S&P 500 earnings would be about 18 percent higher in 2018 than in 2016.
     
    But it noted that the biggest driver of that increase – more than 50 percent of it — would come from Trump’s promised corporate tax cut to 20 percent from 35 percent. Another 30 percent of the earnings rise over the next two years would likely come from fiscal stimulus and nearly 27 percent from acceleration in share buybacks, it added.

     
    One final note of weariness by Morgan is the possibility that companies might pass on cost savings to consumers following Trump’s tax cuts. This abhorrent specter of ‘competing away’ savings is hateful to Morgan and they feel that could pose as a potential pitfall for markets.
     
    God willing, our valiant and industrious corporations will continue to gouge us and take said tax savings to increase corporate bonuses for C level executives and execute superfluous share buybacks to further enhance their standing at their local country clubs.

    Content originally generated at iBankCoin.com

  • There's A Massive Restaurant Bubble, And It's About To Burst

    In January 2009, just three days after his inauguration, an arrogant President Obama, a “community organizer” and one-term senator from Illinois, proclaimed to then Republican Whip Eric Cantor that “elections have consequences, and at the end of the day, I won.”  Unfortunately, he was absolutely right and the consequences of Obama’s election, having already crushed the coal industry, are about to bring the restaurant industry crashing down as well.

    To be fair, Obama hasn’t crushed the restaurant industry single-handedly.  While Obamacare went a long way toward destroying the industry, it’s demise would not have been certain without a little help from leftist state legislators that have passed a slew of egregious minimum wage hikes in recent years (not that Obama didn’t try and fail twice to accomplish the same thing at the federal level).  Add to that a multi-year run of near 0% interest rates that have driven commercial real estate soaring and a dash of “hope” from culinary grads looking to become America’s next  famous celebrity chef and it’s easy to see that you’ve had a recipe for disaster simmering on low heat for years.

    And while he avoided the political attributions we note above, a recent Thrillist article by Keven Alexander highlights the demise of one independently owned restaurant in San Francisco, AQ, that will be shutting down later this month for all the same reasons. 

    When it comes to minimum wage, Alexander highlights that just a $1 per hour minimum wage increase can reduce an independent restaurant’s already thin profit margins by $20,000, or 10%.  So we imagine the $5 minimum wage hike that California just passed is probably slightly less than optimal for companies like AQ in San Francisco.

    I should say before I go any further that all of the restaurant owners and chefs I’ve talked to are compassionate humans who support better coverage and livable wages, and seem on the whole progressive by nature, but restaurant margins are already slim as hell. There are no political agendas here — they’re just genuinely worried about how to afford to pay extra without radically changing the way they do business.

     

    Let’s start with the minimum wage. According to the Bureau of Labor Statistics, of the 2.6 million people earning around the minimum wage in 2015, the highest percentage came from service jobs in the food industry. Though the Obama administration’s attempt to increase the federal minimum wage above $7.25 failed, 21 states and 22 cities have raised the minimum wage starting this year, including Washington, DC ($12.50 an hour), Massachusetts ($11), New York ($9.70), and Arkansas ($8.50).

     

    Considering that hour-wage workers are usually the lowest earners and the increase is essential to ensure they earn an actual living, this is the least controversial of the newer expenses and something almost everyone in the industry supports, in theory, but it doesn’t change the fact that it’s an additional cost that must be factored in. If you have 10 hourly employees working eight-hour shifts, five days a week and you raise the wages a dollar an hour, that comes out to a nearly $20K increase on the year. In AQ’s best year — a phenomenal year by restaurant standards — that would have been nearly 10% of profits.

    And while California is certainly the poster child for misinformed liberal policies, as the Wall Street Journal recently pointed out, they’re hardly alone in their implementation of a massive minimum wage hike in 2017.

    Min Wage

     

    Meanwhile, when it comes to Obamacare, Alexander notes that AQ was hit with an incremental $72,000 of annual expenses in 2015 that didn’t exist in 2012, which eroded another ~30% of the company’s peak net income.

    Then there’s health care. For the better part of its history, the restaurant business was a health care-free zone, which is ironic, given this Bureau of Labor Statistics’ description of the back-of-house work environment: “Kitchens are usually crowded and filled with potential dangers.” With the introduction of Obamacare, most restaurant workers finally got the coverage they’ve needed for years through the employer mandate, but critics often talk about the strain it puts on small-business owners due to a puzzling and controversial element that defines “full time” as 30 hours per week, and not the 40-hour workweek used almost everywhere else (the Save American Workers Act proposes to move this back to 40 hours).

     

    Though this mainly affects bigger restaurants with staffs of 50 or more full-time workers, independent sit-down restaurants still need to provide suitable coverage (meaning it has to be affordable, less than 9.5% of the employee’s income) or face fees of $2K per employee. Consider AQ. Semmelhack told me that in 2012 they paid $14,400 for health care costs. In 2015, they paid $86,400. That’s an increase of $72K MORE per year than 2012, or 29% of their best year’s profit.

    Then there are those pesky rental rates which have been driven ever higher by nearly a decade of 0% interest rates that have resulted in artificially high demand for “yieldy” commercial real estate.

    In the restaurant world, rent always sucks. Unless you manage to play it perfectly, as a restaurant owner you’re either moving into a sketchy or “emerging” neighborhood where the rent is cheap but few want to go there, or you’re overpaying for an established ‘hood and need to be a runaway success from day one. And even if you do manage to make it in the former type of neighborhood, your success often ends up pricing you out of the ‘hood you helped revitalize.

     

    In Miami, Michelle Bernstein’s Cena by Michy helped rebirth the MiMo historic district but was forced to close this year, after the landlord attempted to triple the rent. And even Danny Meyer had to close and move Union Square Cafe in New York, which, since 1985, had served as one of America’s culinary landmarks, when he couldn’t rationalize paying the huge rent hike the landlord proposed.

    For all the reasons above, Alexander notes that “AQ will serve its last meal sometime in January, 2017″…an inconvenient fact that we’re sure the liberal politicians in Sacramento will promptly ignore. 

    And while the publicly-traded restaurant companies have potentially started to take note of some of the risks above…

    Restaurant Chart

    …the broader markets, which are also exposed to the same risks albeit to varying degrees, couldn’t seem to care less.

  • Are Chinese Philosopher Kings Losing Their Yuan FX Religion?

    Submitted by Eugen von Bohm-Bawerk via Bawerk.net,

    It took a while, but the world are slowly coming to grips with the simple fact that the red-suzerains in Beijing are not the infallible leaders en route to a new superior economic model as they thought they were. All the craze that emanated from the spurious work of Joshua Cooper Ramo, which eventually led to works like “How China’s Authoritarian Model Will Dominate the Twenty-First Century,” are slowly catching up to reality. We never bought into it and our prediction for 2017 is that most of the pundits commenting on the red Dragon will realize how bad the situation in China really is.  That being said, there were still Japan-bulls in the late 1990s that still believed Japan would eventually become the largest economy on the planet and dominate the world. If we are right, the heliocentric worldview China apparently is taking will quickly turn geocentric, just as it is about to do in the western world. Domestic problems will engulf the leadership in Beijing, and there will be less time to squabble over petty reefs in the South China Sea. The danger is obviously that the political establishment in China will be in dire need to distract the hordes of angry masses that are about to lose their life savings.

    Champions of authoritarian rule saw in China a way to Kallipolis, whereby the platonic Philosopher Kings finally get to rule the world. Not few times have we debated the “China Model” with Chief Economists, Ph.Ds. and other “serious” people, and in just as many times have we been surprised to discover the passionate disdain for so-called lower classes and the unabashed need to guide these fully grown-up children onto the righteous path. A small tax tweak here, a subsidy there and people can allegedly be incentivized to do the “right” thing. Right, obviously, is whatever the philosopher kings deem it to be.  China epitomized Kallipolis for all the kings out there, which is probably why criticism of the system felt personal to them. The China Model has thus been embraced wholeheartedly by the Western elite and explains why China’s many faults have not been addressed properly.

    Another reason for the kings to be a bit evasive is that the China model is, as aforementioned, exactly what they want, but they cannot really say that. China, as we all know, is extremely simple. The lowest platonic classes, the laboring classes, are unbalanced in the sense that greed and foolishness rule these people, therefore they can, and should, be used as lowly paid slaves to the betterment of the whole. The savings they accumulate are controlled and directed as the kings see fit. By plowing enormous amounts of savings back into the system, the economy, as measured by GDP, “grows” and the kings can point to all wonders they are able to create.

    There is a great downside to this system though. The hapless laboring classes cannot afford to live the life their output from production would suggest they should. Since the kings set both wages and return on savings, a mismatch is created between domestic purchasing power and domestic output.

    In their infinite wisdom, the kings decided to rectify this little glitch by sending excess production abroad through heavy-handed exchange rate manipulation. Should foreigners not spend enough though, then the politburo could always resort to domestic boondoggles as convenient safety valves. After the financial crisis of 2008 and 2009 this is exactly what happened on a scale never ever witnessed before.

    However, in the period leading up to the great financial crisis foreigners bloated on credit were more than happy to indulge themselves with cheap Chinese goods. The Chinese on their side had to adjust their monetary policy to subsidies exports and penalize imports through a low valued Yuan.  In order to do so the PBoC were forced to buy billions of dollars and other FX flowing into mainland China. Despite raising banks’ reserve requirements, printing up RMBs at this pace led to a massive inflationary boom in the Chinese economy. In other words, the Chinese monetary policy was extremely pro-cyclical as they essentially were forced to copy the folly conducted in the Eccles building.

    But as everyone loves the effects of inflation and the false prosperity that spreads throughout society, no one complain whilst the good time lasts. When the imbalances become too great to hide though, it all turns ugly quite quickly. The inflation correspondent with capital inflows must necessarily become deflationary when money starts to flow out. As domestic bubbles start to deflate and economic prospects turn sour, capital will flow out and the whole process reverses. Downward pressure on the exchange rate forces the PBoC to buy back legacy Yuan’s by selling FX reserves. At this stage reserve requirements are lowered in order to free up more Yuan by leveraging banks’ balance sheets, but as the inflationary boom could not be fully mitigated on the way up, the deflationary forces on the way down are impossible to control.

    two-stages-of-pboc-mon-pol

    The blue and red circles are represented with the same color code in the Yuan chart below. In the blue area the exchange rate is kept stable despite inward capital flow as the PBoC sells Yuan to buy dollars. In the red area the Yuan is falling against the dollar and the PBoC is forced to buy back Yuans with previously accumulated dollars. Since liquidity is withdrawn domestically a falling exchange rate is associated with internal deflation.

    yuan-corresponding-to-two-stages-of-mon-pol

    We can see the abovementioned process in bank reserve requirements and FX reserves. Reserve requirements, in blue below, are lifted as FX reserves increases and in red we see the reverse process as reserve requirements are lowered alongside falling FX reserves.  These are coordinated in order to mitigate negative effects from changes in the domestic money supply.

    res-req-vs-fx-res

    The problem for PBoC is that their task is impossible to pull off. The enormous amount of waste embedded in the system as a result of years of inflationary policies has left the Chinese economy riddled with bad debt and probably trillions in non-performing loans. Consequently, investors believe further exchange rate depreciation will be needed and the offshore (CNH) forward market price in the typical Chinese approach of incremental change. As long as FX reserves are plentiful, complacency will be the name of the game, but that will leave a lot of people exposed to a rude awakening.

    yuan-and-yuan-deval-expection

    With the PBoC fighting to defend the Yuan they will certainly create trouble in domestic money markets. Draining banks for Yuans as dollars flow abroad; in times when debt-funded boondoggles must roll-over credit lines is a recipe for financial crisis. Banks will be forced to scale back, the infamous Chinese shadow system is under regulatory attack and in any case, debt funding costs will be more expensive for the thousands upon thousands of companies with restricted cash-flows.

    shibor-and-repo

    tot-debt-by-sector-china

    In conclusion, the Chinese miracle is built on a pile of debt with only an unconstrained printing press to support it.  As use of the printing press now is heavily restricted, the balancing act of supporting the Yuan and supplying enough money to local markets, will be nigh on impossible. Some argue that there will not be a funding crisis in China, simply because the PBoC can always fund a highly centralized credit system. The problem with this line of thinking is that the exchange rate target will have to be abandoned if they do. Either there will be large scale devaluation or alternatively a domestic financial crisis.

    All this does not necessarily mean a Lehman-moment, where everything crashes overnight, but rather a “managed” transition whereby further credit creation is hamstrung by the lack of real capital funding available. In short, China will evolve more like Japan, with something close to zero growth for years, if not decades, as the legacy of credit fuelled “growth” is never properly dealt with.

    The question of whether to let the exchange rate or the banking system take the hit seems to be a question up for debate, even among the red kings in Beijing. Late 2014 it seemed like they wanted the domestic banking system, and hence “growth” adjust. The PBoC decided to put the brakes on and slow the economy down. Commodity prices collapsed as the China Miracle probably grinded to a halt. The fantasy GDP numbers obviously did not reflect an economy at a standstill, but neither money flows nor commodity prices do lie in that regard. Inclusion into the SDR basket was probably so important that they were willing to sacrifice short-term growth.

    However, from mid-2016 it seems Beijing panicked and with the SDR inclusion secured, the PBoC seem hell-bent on stimulating the economy again. As they crank up the printing press once more, further Yuan depreciation will be the way forward. That being said, internal inconsistencies have grown so large that the printing press might not do much good meaning they will end up with a weaker Yuan and no ultimately no growth.

    pboc-balance-sheet-vs-trend

  • Julian Assange Talks To Sean Hannity: "Big Powerful Actors Want Revenge" – Full Fox News Interview

    As previewed yesterday, today at 10pm ET, WikiLeaks’ Julian Assange would be interviewed by Fox News’ Sean Hannity, in a wide ranging discussion touching most notably on whether or not Russia provided WikiLeaks the hacked Democratic emails – as pointed out yesterday, the answer was a “1000%” no.

    For those who are unable, or unwilling to watch, Fox, here is a link to the full interview which will take place over the next hour, until 11pm ET.

    Assange’s concluding remarks were uncharacteristically emotional:

    “I have been detained illegally, without charge for six years, without sunlight, lots of spies everywhere. It’s tough… but that’s the mission I set myself on. I understand the kind of game that’s being played – big powerful actors will try and take revenge…it’s a different thing for my family – I have young children, under 10 years old, they didn’t sign up for that… and I think that is fundamentally unjust… my family is innocent, they didn’t sign up for that fight.”

    Full Interview below (starting at 49:08…)

  • China Warns May Dump Treasuries To Keep Yuan Stable, Prepares More Capital Controls

    In China, announcing new (and ever more ineffective) capital controls has become a daily thing.

    Last week, Beijing unveiled its latest set of capital controls according to which Chinese banks would be required to report all yuan-denominated cash transactions exceeding 50,000 yuan (around 7,100 US dollars) to the People’s Bank of China (PBOC), down from the current level of 200,000 yuan. Cross-border transfers more than 200,000 yuan by individuals would also be subject to the report process.

    Then, overnight, China’s currency regulator, the State Administration of Foreign Exchange (SAFE) added its own round of capital control limitations, when it announced it wanted to close loopholes exploited for purposes such as money laundering and illegally channeling money into overseas property. As a result, while the regulator kept existing quotas of $50,000 of foreign currency per person a year, citizens faced draconian new currency exchange disclosure requirements, requiring foreign currency buyers to indicate how they plan to use the money and when they plan to spend it. Additionally, mainlanders would be restricted from using the FX proceeds to buy overseas property, securities, life insurance or other investment-style insurance products. In fact, among the list of approved uses of funds are tourism, schooling, business travel and medical care. Which means any offshore asset purchases have been effectively limited.

    What made the above capital controls especially amusing is that as Xinhua reported over the weekend, “the policy stoked worries that the government is trying to impose capital control in a disguised form.” And since the official admission of capital controls would only lead to even more panicked outflows, PBOC economist Ma Jun intervened, saying that the new cash transaction rules, i.e. capital controls, are “not capital control at all.

    We leave it up to readers to decide what that means.

    Then, fast forward two days when China, no longer bothering with euphemisms, admitted that it has “studied possible scenarios of yuan exchange rate and capital outflows in 2017 based on models, stress tests and field research, and is preparing contingency plans”, Bloomberg reported citing people familiar with the matter.

    Among the “contingency plans” are proposals recently suggested by such banana countries as Turkey and Venezuela, which include China’s government  asking state-owned enterprises to temporarily convert some foreign-currency holdings into yuan, said Bloomberg’s sources, who are clearly mostly interested in the market’s response to this particular Bloomberg-mediated trial balloon

    Bloomberg adds that financial regulators have already encouraged some SOEs to sell FX under current account.

    But most troubling is the admission that “China may further cut U.S. Treasury holdings in 2017 if needed to keep exchange rate stable; size of reduction depends on capital outflows and FX market intervention,” or in other words, the worst-case scenario which so many serious “economists” have said can not conceivably happen.

    Well, China is now actively considering it, which means that should the Yuan continues to slide, Beijing is close to implementing it.

    Not unexpectedly, as a result of this latest daily escalation in China’s capital controls, the offshore Yuan is now surging, and is back under 6.95, up nearly 200 pips on the session so far.

  • It's Not Just The Russians: Ex-CIA Chief Claims "More Than One Country Involved" In US Hacks

    Following Trump's earlier Tweet, the following from current House intelligence chair and a former CIA chief seem very notable…

    "I think the possibility that there’s more than one country involved is really there," warned former CIA Director James Woolsey during a recent CNN interview, suggesting that political hacks in the U.S. could be the work of more than one foreign country.

     

     

    As The Hill reports, Woolsey, who endorsed President-elect Donald Trump, said:

    "I don’t think people ought to say they know for sure there’s only one. I don’t think they’re likely to be proven correct. It shouldn’t be portrayed as one guilty party,"

     

    “It’s much more complicated than that. This is not an organized operation that is hacking into a target. It’s more like a bunch of jackals at the carcass of an antelope.”

     

    Woolsey suggested China and Iran could be behind cyber breaches in the U.S.

     

    “Is it Russian? Probably some,” he said. "Is it Chinese and Iranian? Maybe. We may find out more from Mr. Trump coming up today.”

    This follows Trump's comments on Sunday hinting he would reveal new information about alleged Russian hacking during a New Year’s Eve celebration at his Mar-a-Lago resort in Palm Beach, Fla.

    “[I know] things that other people don’t know,” he said. "I just want them to be sure because it’s a pretty serious charge. I think it’s unfair if they don’t know.”

    Additionally, House Intelligence chairman Devin Nunes (R-Calif.) says there is no evidence Russia assisted President-elect Donald Trump in winning the White House. (via The Hill)

    "There’s no proof that we have from intelligence sources that I’ve seen that show that the Russians were directly trying to help Trump,” he said in a Washington Examiner interview published Tuesday.

     

     

    “We have been screaming here in the House of Representatives for many years that the Russians, Chinese, Iranians, North Koreans and other bad actors, every day, were attacking every imaginable place that you could think of, whether it be political parties, to the United States Congress, to the Department of Defense, to our intelligence agencies, to our financial institutions,” he said.

     

    “Specifically, I’ve always said Russia was the most sophisticated actor in this arena,” Nunes added. "This is something that [Democratic presidential nominee] Hillary Clinton knew damn well when she got her private server, that the Russians could have the capability to get in there.”

     

    “I know, every day, that the Russians likely have the capability to try to listen to my phone calls or read my emails and I just have to make the assumption that they do – or the Chinese or other bad actors.”

    Trump has vehemently denied Russia helped him win the White House, and incoming White House press secretary Sean Spicer on Monday said “zero evidence” exists for Moscow’s interference.

  • Trump Reveals "Very Strange" Delay In Russian Intelligence Briefing

    The tweet storm continues into the night as President-elect Trump reveals that the intelligence briefing he is supposed to receive on the alleged Russian hacking has now been delayed until Friday…

    A few things jump out immediately:

    First, we are sure opposition members will feel the need to comment on Trump’s revelation on the timing of the briefing (was it confidential?);

     

    Second, the use of quotes around “intelligence” is a not so subtle stab at the current agencies (all 17 of them);

     

    Third, calling the hacking “so-called” makes it clear Trump remains unconvinced, and that is reinforced by the comment that they need more time to build the case; and

     

    Fourth, describing the delay as “very strange” seesm to strongly implies ‘CIA plot’.

    We await the ‘shock’ from The White House at Trump’s tweet.

     

  • Luxury Apartment Bust Spreads To Main Street

    For months we’ve warned about the impending collapse of the luxury real estate markets in New York and San Francisco amid tepid demand and a supply glut that is getting ready to flood the market with new capacity (see here, here and here).  Of course, one of the first signs of excess capacity comes in the form of rent concessions, which as we pointed out over the summer, have been relatively easy to find in the large metro markets.

    “Listings that once rented in just two to three weeks can now take two to three months to rent,” explains Paul Hwang, principal broker at Skybox Realty, a San Francisco-based real estate agency.

     

    At least four new apartment buildings have opened within a three-block radius of one another during the last 18 months in San Francisco’s thriving South of Market neighborhood, which is home to major tech companies like Airbnb, Pinterest and Yelp (YELP).

     

    Those four buildings — Jasper, 340 Fremont, 399 Fremont and Solaire — frequently offer some sort of bargain for prospective renters. 340 Fremont is offering six weeks of free rent; Solaire is pitching four weeks of free rent, free on-site storage and $1,000 discounts to renters who work at tech companies like Apple (AAPL), Facebook (FB) and Yahoo (YHOO). Meanwhile, another building, 399 Fremont, even tried giving away free bikes one weekend.

    But new buildings weren’t the only ones offering incentives.  Craigslist was also flooded with listings like the one below offering free rent and a $500 gift card to interested renters.

    Rent Concession

     

    Unfortunately, as the Wall Street Journal points out, NYC and San Francisco aren’t the only cities across the country that are about to get flooded with new luxury apartments.  In 2017 alone, 378,000 new apartments are expected to be completed across the country, or roughly 35% more than the 20-year average. 

    Developers in New York are already offering up to three months of free rent on some projects. In Los Angeles, some landlords are offering six months of free parking, and some in Houston are waiving security deposits. Meanwhile, MPF Vice President Jay Parsons said he expects little or no rent growth in urban rental markets this year.

     

    “This will be a very challenged leasing environment almost everywhere,” Mr. Parsons said.

     

    The slowdown, he said, is being driven not by a pullback in demand but rather a flood of new apartments. Demand for urban properties jumped after the housing bust as young, high-earning professionals eschewed homeownership and flocked to big cities. Developers responded by focusing most of their efforts on high-end properties.

     

    Now, though, the number of upscale apartments coming onto the market appear to be outpacing the number of renters able to move into them: More than 50,000 new units were rented by tenants in the fourth quarter in the U.S., six times the number in the year-earlier period. But that demand was overwhelmed by the 88,000 new units that were completed in the quarter, the most since the mid-1980s, according to MPF.

     

    That gap looks set to widen in 2017. More than 378,000 new apartments are expected to be completed across the country this year, almost 35% more than the 20-year average, according to real estate tracker Axiometrics Inc.

    And smaller cities like Dallas, Atlanta and Nashville are expecting some of the largest supply gluts.

    The sluggishness is expected to spread across the U.S., hitting markets from Nashville, Tenn., and Dallas to Los Angeles and Atlanta.

     

    Dallas is expected to see nearly 25,000 new apartments delivered, compared with the long-term average of roughly 9,000 new apartments a year, according to Axiometrics. Los Angeles is expected to get roughly 13,000 new apartments, nearly double the historical average.

     

    Nashville could see some 8,500 new apartments, more than triple the typical 2,400 apartments completed annually.

     

    John Tirrill, managing partner at SWH Partners, an Atlanta developer that has several projects under way in the Nashville area, is leasing a new five-story property with a fitness center, yoga and barre studio and swimming pool. He has lowered rents from $2.25 a square foot to $2.10 a square foot—a $150 discount on a 1,000-square-foot apartment—and is offering one to two months of free rent.

    Rental Supply

     

    Meanwhile, as Wolf Street notes, rent concessions have become fairly pervasive across the country.

    Rent Concession

     

    And, banks are starting to get just a little worried that they financed a few too many luxury skyscrapers.

    Banks are pulling back on lending, which could help slow the pace of construction starting in late 2018.

     

    “We’re just being really selective,” said John Cannon, a senior vice president at Pinnacle Financial Partners, a Nashville-based financial-services company that has increased its focus on multifamily lending in the last couple of years. “Multifamily has a large number of units on the ground that they really have to demonstrate some absorption.”

    We vaguely recall seeing the single-family version of this movie a few years ago…

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