- Is The American Dream Dead?
Submitted by Tom Chatham via ProjectChesapeake.com,
The American dream is not a thing in physical terms but an idea that lives or dies with certain beliefs in society. Can it die? Yes it can if those beliefs are purged from the conscience of society. This is what Jefferson meant by watering the tree of liberty with the blood of patriots from time to time.
Many people bemoan the loss of the high paying jobs and the mansions and swimming pools we all want to have. They look around them and see their dreams of easy living collapsing and the debt piling up about to drown them. They see life becoming harder every day and society becoming more dangerous.
The American dream is not about houses, swimming pools, expensive vacations or fancy cars. These are all benefits of that dream. They are the icing on the cake, not the cake itself. The American dream is about the freedom to earn those things if you are smart enough and work hard enough.
The American dream is about freedom. The ability to live the way you desire and to be all you can be in society. It is the freedom to build and accumulate and make something of yourself. It is the freedom to go from rags to riches in one generation because of your will and abilities. It is the freedom to own your own property and use it to better your position in society.
The American dream is about the freedom to walk into a clearing with a hoe and shovel and build a farm. It is about the freedom to walk into a stand of timber with nothing but an axe and an idea and build a town. It is about the freedom to design a new machine from your imagination and build a factory to use it.
For the dream to die freedom must also die. As long as you have the freedom to do your best the dream is always possible. The slow loss of personal freedom over the past century has led to the diminishing of the possible. We no longer see the possibilities because that ability is being taken away from us. Tyranny is the lack of possibilities forced on the population. You can no longer be all you can be because you are constrained by others that want to limit those possibilities.
When your freedom is constrained by those that are willing to use force to limit those possibilities, you must defend that freedom with force to preserve it. That is when the tree of liberty gets watered. That is when the dream is reborn to flourish once again.
The American dream can die but only when we fail to water it and let it die. If Americans want to eat cake then they first must bake it. Only then will they be able to treat themselves to the icing on it that we all love so much.
- This Is What Central Bank Failure Looks Like (Part 2)
Following The BoJ's utter collapse from omnipotence to impotence, it seems the rest of the world is losing faith in Central Banks "control," as nothing says The Fed knows nothing like the collapse of Fed credibility to… nothing…
The market now sees ZERO probability of a rate-hike in March…
And if we need confirmation of the "error"…
We are sure Janet will clear up all the confusion tomorrow.
- What Janet Yellen Could Say Tomorrow To Unleash A Market Surge
While the markets have been generally lacklustre in the past two days, much of the enthusiasm associated with the last hour spike on both Monday and Tuesday had to do with optimism involving a significant relent by Janet Yellen during her semi-annual 2-day testimony in Congress starting tomorrow at 8:30 am.
And while Yellen will certainly have a tough time reconciling the worst start for the S&P since 2008, or the accelerating slowdown across the global economy with the Fed’s dot plot which still forecasts 4 rate hikes in 2016, some such as Citi’s Steven Englander believe that Yellen will not only not relent as much as consensus believes she will (negative rate odds are well over 10% by the end of 2017), but will “deflate some of the recent enthusiasm” and “unwind some of the panic buying” of US fixed income.
While Englander admits that while the prevailing sentiment will be one of more of the same by Yellen, and will likely be accompanied by selling of rallies by traders, there is an odd chance that Yellen will try to break out of the trap the Fed has put itself in, and capitulate with a dovish relent, unleashing a major stock surge.
This is how she would do it:
The dovish surprise is if she explicitly removes March from the hiking calendar (which would be Draghi-esque in front running the FOMC), broadly hints at a delay or expresses concern on downside risk to long term inflation or structural stagnation. The intention would be to show US households, business and investors that the Fed has their back.
The Citi strategist notes that there is a major problem with this admission of policy error: “investors would likely interpret removing March from the calendar as a prelude to endorsing the much bigger unwind of policy rate hike expectations that is now priced into asset markets.”
Moreover, it is unclear whether the dovishness would be viewed as asset market friendly or as affirming the economic and asset market slump without really offering any policy alternative that would be considered effective. She may even be pressed on what policies the Fed would put in place if these downside risks manifested themselves. So there is a risk that a soothing message will end up as being viewed as an opportunity to sell from better levels.
And then this:
It is unlikely, however, that pointing to negative rates or QE4 would work, as investors are increasingly skeptical that more of the same policy mix would be effective in hitting final goals.
In other words, after massive policy errors by Draghi in December and Kuroda in January, Yellen may complete the trifecta by panering to a petulant stock market, and in the process not only not send it higher, but destroy the last shred of cred the Fed may have had, leaving the central bank cabal with just one option, the final one: money paradrops, the kind many serious economists have already called for.
Englander sums up his analysis with a baker’s dozen of questions which Yellen will provide hour-long, single sentence, coma-inducing answers to.
From Citi’s Steven Englander
Yellen testimony meets policy ineffectiveness meets ‘sell everything’ mood
Fed Chair Yellen will confront political, asset market and Fed demons at her testimony this week. The narrative that she faces is that the US economy and asset markets are being sucked into the downdraft caused by oil, China, EM, reserve manager and SWF asset selling, commodities, currency war, the strong USD, weak European banks, weak Japanese banks, weak US banks and policy ineffectiveness & to name a few.
My expectation is that she will deflate some of the enthusiasm for negative rates, arguing that the Fed is far from seeing the necessity, even if that is a policy option that remains open in extremis. This could unwind some of the panic buying of US fixed income and provide some support for USD if she is convincing enough. However, the impact may not be long lasting. I have detected very little enthusiasm among clients for positioning going into the Yellen testimony.
Her baseline intention is to convey optimism on the US economic recovery and the ultimate attainment of inflation goals, and awareness watchfulness on risks that asset market disruptions and foreign economic weakness could spill over into the US economy, but no presumption that such shocks will derail the expansion in either the short or long term. On rates she is unlikely to go beyond the January Statement, which retained data dependence, did not write off hikes on any time horizon, but acknowledged greater risk. Yellen s sweet spot is to express strong confidence in recovery, tempered by awareness that domestic and international financial market strains could spill over into the domestic economy. However, what is crucial is that she also convey that Fed watchfulness does not mean that they will give financial markets a veto on continued Fed hiking.
She is likely to emphasize the improvement in income distribution and some tentative indications that wages are beginning to respond to the tighter labor market. Part of the message is that the rapid increase in real labor compensation will support consumption and housing (A Working class hero is something to be) and be enough to carry the economy even if business investment is subdued. She will convey satisfaction at signs that wages are rising but try and diffuse any expectation that this means a faster Fed tightening cycle. The weakness in headline inflation will be blamed almost entirely on commodities, the USD and weak emerging economies.
Her hope would be to unwind some of the bearishness that has engulfed asset markets, and this would be supportive for USD, rates and equities. However, market pessimism may be so deep seated that good news is viewed only as an opportunity to sell at better levels.
The dovish surprise is if she explicitly removes March from the hiking calendar (which would be Draghi-esque in front running the FOMC), broadly hints at a delay or expresses concern on downside risk to long term inflation or structural stagnation. The intention would be to show US households, business and investors that the Fed has their back. The problem is that investors would likely interpret removing March from the calendar as a prelude to endorsing the much bigger unwind of policy rate hike expectations that is now priced into asset markets. Moreover, it is unclear whether the dovishness would be viewed as asset market friendly or as affirming the economic and asset market slump without really offering any policy alternative that would be considered effective. She may even be pressed on what policies the Fed would put in place if these downside risks manifested themselves. So there is a risk that a soothing message will end up as being viewed as an opportunity to sell from better levels.
The hawkish risk is harder to define. Market pricing is dovish, bordering on depressed, so anything upbeat should be viewed as hawkish. However, client conversations suggest that investors expect this kind of upbeat message and the key will be she can go beyond a pro-forma expression of confidence and convince investors that 7 bps is on the low side for 2016 Fed hiking expectations. Maybe a repetition of Fischer’s But we have seen similar periods of volatility in recent years that have left little permanent imprint on the economy with great emphasis would succeed.
A strong assertion that the Fed expects the US economy to rebound would be viewed as hawkish and USD positive, but in current circumstances it may not be bullish for asset markets if investors see it as misguided.
Paradoxically, a convincing affirmation that the Fed has tools that would be effective in stimulating the economy would support the USD and asset prices. This is not hawkish in the normal sense but would suggest that the despair on long term outcomes is misplaced. It is unlikely, however, that pointing to negative rates or QE4 would work, as investors are increasingly skeptical that more of the same policy mix would be effective in hitting final goals.
Given that it is an election year there will likely be more circus in the air than normal. A selection of questions she is could face:
1) How much has the US economy slowed?
2) Is the slowdown a blip or a more prolonged slump?
3) What are the risks of recession in coming months?
4) Is fiscal policy the right tool to stimulate the US economy? Would the Fed adjust its balance sheet higher to facilitate fiscal stimulus?
5) To what extent did Fed lift-off contribute to these economic risks?
6) How does she assess the contribution of lower oil to the US economic and financial outlook? Is there a point at which it shifts from being a plus to a minus?
7) How material are the problems in China, EM and global banks to the US economy?
8) What tools does the Fed have to deal with a future slowdown?
9) How keen are they on negative rates, are negative rates permitted under US law and, if they are not keen, what else is there?
10) Will she rule out March?
11) Does the Fed think other central banks are engaging in currency wars and what is the appropriate response?
12) Does she expect CNY to go up or down and what effect should it have on the US economy?
13) How automatic are Fed hikes if wages and inflation edge up and asset markets remain uncertain
- Global Stocks Enter Bear Market
With stock markets from every continent plunging (Japan most recently), it should be no surprise that MSCI's world index has entered a bear market – dropping over 20% from its April 2015 record highs. However, as Gavekal notes, while much of the drag on global stocks is from collapsing emerging markets, the average developed market stock is down 23% in the past year.
The World enters a bear market… at a crucial level…
But as Gavekal Capital's Eric Bush notes, the average stock in the developed world is off 23% from its 1-year high…
And is down 8% over the past year.
52% of all developed world stocks are in a bear market over the past 200-days (i.e. down 20% from the 200-day high). During the worst of the 2011 drawdown, 65% of stocks were in a bear market.
Not a single sector has avoided falling into a correction over the past year. The classic defensive sectors have once again performed better on a relative basis. The average consumer staples company is 12% off its 1-year high, the average utility company is 13% off its 1-year high, and the average telcom company is 18% of its 1-year high.
Energy stocks continue to be the dog in the market as the average energy company is down an astounding 40% of its 1-year high. Materials (down 28%), financials (down 24%) and tech (down 24%) are following energy lower.
From a regional perspective, the drawdown has been pretty uniform. The average stock in DM Americas is off 24% from its 1-year high, the average stock in DM Asia is off 21% and the average stock in DM Europe is off 23%.
However, if one looks at the average performance over the past year, DM Asia is outshining the other region. The average stock in DM Asia is only down 1% while the average stock in DM Europe is down 9% and the average stock is down 14%. The average stock in DM Americas is down over the past year than it has been at any time since September 2009.
- "I Don't Trust Deutsche Bank" David Stockman Unleashes Truth Bomb: "When The Crunch Comes, Bank CEOs Lie"
Following this morning's proclamation by Deutsche Bank co-CEO John Cryan that Germany's largest bank is "rock solid," David Stockman exposed the ugly truth that everyone appears to have forgotten from just 7 years ago…
"in my experience is that when the crunch comes, bank CEOs lie"
Stockman details the Morgan Stanley, BofA, Lehman, and Bear Stearns bullshit that occurred before exclaiming…
"I don't trust Deutsche Bank. I don't trust what they're saying. And there's reason why the banks are being sold all across the world… because people are realizing once again that we don't know what's there [on bank balance sheets]."
Worth considering before tomorrow's European open…
- "Jingle Mail" Makes Comeback In Canada As Underwater Borrowers Mail Keys Back To Banks
We’ve spilled quite a bit of digital ink documenting the trials and travails of Alberta, the heart of Canada’s dying oil patch and ground zero for the pain inflicted by 14 months of crude carnage.
At the risk of beating a dead (or at least a “dying”) horse, you’re reminded that violent crime is soaring in the province, suicide rates are up by a third as is food bank usage, and as for unemployment, well, Alberta lost 19,600 jobs last year – the most in 34 years.
While it’s not entirely clear where things go from here, it’s a good bet that the situation will deteriorate further given that, at last check, WCS was trading just CAD1 above the marginal cost of production. In other words: Canada’s producers aren’t profitable and thanks to the plunging loonie, the BoC doesn’t look particularly likely to help them.
That means more job losses are in the cards and the prospects for the increasingly profitable repo business look better than ever. We’ve also documented the soaring cost of homes in Canada, on the way to noting that just about the last thing you want to have is a collapsing economy, a propery bubble, and record high household debt.
That’s a recipe for disaster and sure enough, we’re starting to see the first signs that the market is beginning to crack as Albertans begin mailing the keys to their underwater homes back to the bank. “A combination of high debt and lost jobs make [jingle mail attractive] in a province going through a significant economic reckoning,” CBC writes. “It’s enough of a concern that the federal government is watching the Alberta market closely.”
As they should be. The wave of job losses occasioned by the rout in oil markets has put already leveraged households in a tough spot. Now, the pressure is apparently more than many homeowners can bear.
“People [are] saying that we can’t make a go of it and mail the keys to the bank,” Don Campbell, senior analyst with the Real Estate Investment Network told CBC. “In the big cities, not so much because the average sale prices haven’t really dropped much, we haven’t seen the pain yet. But Calgary is getting pretty tight.”
Yes, it’s “getting pretty tight” in Alberta and that’s problem for banks. Here’s why (again from CBC):
Alberta is the only Canadian province to broadly offer non-recourse residential mortgages. Those are loans with at least a 20 per cent down payment and thus are not insured by the Canada Mortgage and Housing Corporation (CMHC).
If you walk away, you lose your home, but otherwise have no personal liability. Elsewhere in Canada, your lender can take you to court and seize other assets, such as RRSPs, vehicles, and even garnishee your wages.
Jingle mail was an enormous problem in Alberta in the 1980s, when mortgage rates were hovering around 20 per cent and people began leaving the province to find work elsewhere. It made a rough housing market even worse when banks were forced to sell off abandoned homes at a discount. It also played a role in the U.S. housing crash.
In the mid-eighties, around a half million people left Alberta to find work in other parts of the country and were able to walk away from their mortgages with virtually no personal consequences, not even to their credit rating.
That’s the scenario that the Finance Department is worried about now.
“These non-recourse mortgages could create incentives for some homeowners facing an income shock to pursue a strategic default and thus place further downward pressure on prices,” read one of the reports obtained by CBC News.
In other words, if you’re an Albertan O&G worker who was just laid off thanks to Saudi Arabia’s war of attrition with the US shale complex, you can simply walk away from your mortgage with no consequences.
Obviously, that’s bad news for Canada’s banks and underscores the following assessment we presented just three weeks ago: “…as Canada’s depression worsens, expect overburdened households to simply fold up under the pressure. That’s when the dominos start to fall in earnest as a cascade of foreclosures bursts the nation’s housing bubble once and for all and as the world discovers how exposed Canada’s banks are to the country’s levered up families.”
“I had four higher end sales last month, all four transactions, the values were off 20% to get a buyer to the table, in order to get a deal to stick,” Joel Semmens, a realtor in Calgary with Re/Max said.
Expect that negative sentiment to spread quickly in a market that is clearly showing signs of froth. We close with still more commentary from a CBC Op-Ed regarding Calgary’s “hollowed out” downtown:
The heart of our city is hollowing out.
Gone are thousands of downtown white collar office jobs, as oil and gas companies cut employees and slash entire departments.
To a Calgary eye, cranes symbolize good times. A darkened office floor is an economic black eye.
I think it’s tough for people to come to work every day and see empty office space. For a lot of people, particularly young people, they haven’t been through such a dramatic recession before.
I would say the more seasoned people have probably a little bit more tolerance for it, because they have seen it before. Calgary had significant growth in the late 70’s, from a downtown office space perspective. In some ways, it was almost harder in the 80’s, because all of a sudden you have extra capacity added on in a rapid rate and then contracted very quickly. This is definitely different than 2009 where office space was threatening to be as high as it was today.
The big buzz word these days is “diversification.” Do you think we’re capable of diversifying to the point of making up for the jobs lost, if not short term, then in the long term? If so, in what sectors?
In terms of occupancy of these buildings, do you think they may sit for vacant for years on end?
I think is going to be slower absorption that it has been, in the last five years, but I think there’s no need to panic at the stage.
Right. There’s no need to panic.
Yet.
- Carnage Continues – Japanese Stocks Crash (Again) As Australia Enters Bear Market
Shortly after we detailed the scale of carnage in Japan – a mysterious massive panic-seller of Yen appeared… as Kuroda heads for Parliament…
But it's not holding…
Another night, another utter bloodbath in AsiaPac. Japanese markets are plunging (NKY down 600 from US session close) along with USDJPY as Kuroda readies himself to face parliament (and Abe says he "trusts Governor Kuroda.") Once again banks leading the pain. Australia is also in trouble, after admissions of cooked data sent stocks lower pushing the ASX 200 into bear market territory.
Kuroda has utterly failed to inspire the non-deflation that they believe threatens the world…
And markets know it… NKY is down 2200 points from post-NIRP highs
Japan is unable to hold any gains…
Then there was this…
- *ABE: TRUSTS BOJ GOVERNOR KURODA
Which sounds like it is begging for a big "but…"
And Australia enters bear market (down 20%) territory…
- If It Looks Like A Recession, And Smells Like A Recession…
Then we must be "peddling fiction…"
The market sees it coming…
The yield curve is collapsing…
And High yield bond risk knows its coming…
And the fundamentals are catching up…
Fed-driven mal-investment and over-production has once again led us to this cliff…
The overall earnings growth trend continues in its downtrend…
And despite all the balther about BLS-manufactured job "creation" – the fact is that the US labor force is weak and getting weaker…
Does it look like we ever "recovered" from the last recession?
Finally, to dismiss the "decoupling" meme, macro-economic data across the entire G10 is collapsing…
So – if it smells like a recession, sounds like a recession, feels like a recession, and looks like a recession… what else can it be? Apart from pure "fiction."
- Deutsche Bank Is Scared: "What Needs To Be Done" In Its Own Words
It all started in mid/late 2014, when the first whispers of a Fed rate hike emerged, which in turn led to relentless increase in the value of the US dollar and the plunge in the price of oil and all commodities, unleashing the worst commodity bear market in history.
The immediate implication of these two concurrent events was missed by most, although we wrote about it and previewed the implications in November of that year in “How The Petrodollar Quietly Died, And Nobody Noticed.”
The conclusion was simple: Fed tightening and the resulting plunge in commodity prices, would lead (as it did) to the collapse of the great petrodollar cycle which had worked efficiently for 18 years and which led to petrodollar nations serving as a source of demand for $10 trillion in US assets, and when finished, would result in the Quantitative Tightening which has offset all central bank attempts to inject liquidity in the markets, a tightening which has since been unleashed by not only most emerging markets and petro-exporters but most notably China, and whose impact has been to not only pressure stocks lower but bring economic growth across the entire world to a grinding halt.
The second, and just as important development, was observed in early 2015: 11 months ago we wrote that “The Global Dollar Funding Shortage Is Back With A Vengeance And “This Time It’s Different” and followed up on it later in the year in “Global Dollar Funding Shortage Intensifies To Worst Level Since 2012” a problem which has manifested itself most notably in Africa where as we wrote recently, virtually every petroleum exporting nation has run out of actual physical dollars.
The point is, it all started with the rising dollar and the ensuing global dollar shortage, and thus, the Fed embarking on what may be the biggest central bank error of all time. To be sure, the consequences are wide ranging: from the collapse in crude, to the tremors and devaluations in China, to the tightening financial conditions, to the (manufacturing) recession in the U.S., and most recently, to whispers that Deutsche Bank, the bank with $60 trillion in notional derivatives, may be the next Lehman Brothers.
Which, incidentally, brings us to none other than one of Deutsche Bank’s most respected credit analysts, Dominic Konstam, who clearly has an appreciation of the existential risk he finds himself in, not only career-wise, but in terms of the entire financial structure. We know this, because after reading his email blast from this morning we realize just how vast the fear, if not sheer terror, is among those who truly realize just how broken the system currently is.
We have reposted his entire letter below, because it represents the most definitive blueprint of everything that is about to be unleashed – especially since it comes from the perspective of one of the people who is currently deep inside Deutsche Bank and realizes just how close to the edge the German bank is.
What Konstam makes clear, in no uncertain terms, is that the the problem is the one we laid out back in November 2014: “It is not oil, it is not in the banks, it is a run on central bank liquidity, especially dollar based and there needs to be much more ($) liquidity.”
He also makes it quite clear that investor fears about contagion are well-founded: here it is in the words of a Deutsche Banker:
The exposure issue has been downplayed but make no mistake banks are heavily exposed to Asia/MidEast and while 10% writedown might be worst case for China but too high for the whole, it is what investors shd and do worry about — whole wd include the contagion to banking hubs in Sing/HKong
His solution? It’s actually quite disturbing to all those who thought that all our warnings that cash would be outlawed were nothing but a joke. For those pressed for time jump straight to the “What needs to be done section” – it’s a doozy.
So back to the original question WHAT NEEDS TO BE DONE. Simple?
- Recognize the problem. It is not oil, it is not in the banks..it is a run on central bank liquidity, especially dollar based and there needs to be much more ($) liquidity. Keynes said to deal with overinvestment boom you cut you don’t raise rates. QE is impractical but getting the dollar down would greatly lift dollar based liquidity. So for a starter Fed shd stop raising rates and clearly signal an extended time out.
- Draghi shd follow up with a one 2 punch, not to get rates down but open the refi spigot to banks and ease liquidity concerns.
- China needs to come clean. Devalue, stabilize reserves and then allocate 1 tn+ to short up strategically important institutions. Stop intervening in equity markets.
- And Basel 3 (?4) should be delayed specifically regarding leverage ratios and threat of higher. As a token move there shd be deemphasis of the SSM/bail in rules until there is clarity from the ECB on liquidity sources for stressed banks.
- how about some fiscal stimulus
- on negative rates — instead of making them punitive on the banks allow the banks to earn the spread, make them punitive to savers.. Cash shd be charged interest — put the micro chip in large denom notes/tax cash withdrawals.. encourage spending not saving .. mortgage rates can be negative and banks can still earn a spread. The spread is the problem not the rate.
The existential fear in Deutsche Bank’s analyst is tangible, as is the implied threat: “don’t do these things, and if Deutsche Bank and its $60 trillion in derivatives blow up, it will be on you.”
And with that we check to the central bankers who will do precisely as instructed, because Deutsche Bank is simply too vast and too systemically important to fail: in fact its failure would be orders of magnitude more costly and more destructive for modern capital markets than Lehman.
As a result, we expect all of Konstam’s suggestions, from a major China devaluation, to a halt to negative rates, to a Yellen relent (perhaps as soon as tomorrow), to negative rates being passed on to savers, to the taxing of cash withdrawals “to encourage spending not saving”, and all the other bullet points. Unless, of course, someone is intent on seeing Deutsche Bank liquidate, as was the case with Lehman.
That said, Konstam’s final sentence is the most ominous:
“Austria July 31 1932 was a great success; Sept 1 1933 beginning of the end (see Worgl experiment, Gesell).”
He is referring to the “Miracle of Worgl“, when during 1932 – in the middle of the Great Depression – the Austrian town unleashed a monetary experiment in which “Certified Compensation Bills” were issued, a form of currency commonly known as Scrip, or Freigeld, one influenced by the monetary theories of the “hyper-Keynesian” Silvio Gesell.
Why does Konstam bring up scrip as the solution to not only Dutsche Bank’s problems, but the entire problem of a run on central bank liquidity, and by implication, credibility?
Because it’s coming… just to save the banks one more, final time.
* * *
Appendix: the part from Konstam’s letter not dealing with policy recommendations is below
Strategy Update: What we need….Main point is still policymakers need to recognize the problem and have a total rethink of strategy…Yellen is a detail in the grand scheme of things if its more of the same about risks to the outlook but labor mkt strong, blah blah Even Draghi has clear re-think issues.. no longer about more negative rates in the way they have been doing it but cutting thru the incipient financial crisis. All of these though are symptoms of the wider problem — the collapse in global liquidity that is on going in the post Fed qe phase, reflected in an overly strong dollar/loss of reserves and end user deleveraging from china to opec to credit. It picks off the weaker links and makes people think that that is the “problem”.
So about 3 weeks everyone was saying if only oil would stabilize.. and “it has”.. but that wasn’t the solution; Now it’s if only euro bank credit stabilizes, and no doubt there will be a level when that happens.. but that won’t be it.. The PCA analysis from Jerome was neat becos it captures the investor base-plus running on the hampster wheel thinking it’s found the problem. The very fact that the weightings have shifted from oil to euro financials doesnt mean the problem is different now then it was, it’s the same problem but PCA can’t find it– by definition. (Correlation is not causality). It merely captures the menu du jour. Soon enough the “problem” will be equities generally or maybe core rates dropping “too low”, these weightings invariably will rise — and thats why its very dangerous to use the last year’s correlation to determine which markets have over or under reacted to the best proxy of the problem, at any particular time. For example rates look too low in the PCA now but that’s precisely becos they were almost invariant to lower oil late last year.
The refrain from the customer base last year if you recall was that rates don’t rally when there’s risk off.. that must be becos of loss of reserves or investor too long etc (George’s QT).. But now they are moving and the correlation is becoming stronger. I would posit that instead of a low correlation dissauding investors from hedging with rates they are actually needing to get super long to make up for poor performance on risk assets becos it is they only thing that comes close to a proper hedge. So the mother of all rate rallies will be driven by investors going way over long on the either side UNLESS or UNTIL policymakers do the right thing… Our traders have been debating whether the market trades long or not with idea that there seems to be better selling.. but CoT got shorter last week and even on the open interest adjment Alex Li did, it still looks to us that the market trades short — or not long enough..And that means we do not want to fade this move absent the policy shift,.. and that means why can’t 10s test the old lows. On the euro financial issue itself.. our equity analysts have got a lot of attention around the specifics of the euro fincl issue from the concerns over exposures to commodities/china.. the inability to earn in a low for long/negative yield world to the overreach of regulation with limitations on capital raising/bail in issues.. One of the main issues we would argue is that policymakers need to be break what wd become a liquidity issue for banks in the status quo. TLTROs had poor take up becos banks were capital constrained and didn’t want to lend — that now limits their access to liquidity going forward so if the exposure/bail in concerns force banks to the ECB there better be an open door. In the xtreme the ECB cd buy the (sub) debt but the politics probably don’t allow that — better might be to simply offer cheap liquidity for alternative vehicles to do so or better yet have unconditional LTROs — either way it is probably not the time to go deeper negative on rates.
The exposure issue has been downplayed but make no mistake banks are heavily exposed to Asia/MidEast and while 10% writedown might be worst case for China but too high for the whole, it is what investors shd and do worry about — whole wd include the contagion to banking hubs in Sing/HKong.. and for the record BIS data is as follows for countries’ bank exposures — we’ll give China first, whole second.. Australia: 32bn/74bn; france 43bn/226bn; germany 28bn/120 bn; japan 70 bn/367bn; uk 169bn/657bn; US 87bn/409bn. Note according to Fed rough proxy of US bank capital is over 1.5 tn so in worst case scenario it would “only” be 3% of capital.. a lot but managable.. but that’s then becomes the problem for UK, French banks in particular,,ironically not obviously Germany so much..altho Europe has the issue of earning the capital that US banks are better able to do.
- America's Most Hated Man Martin Shkreli Sued Over Ol' Dirty Bastard Cartoons
When last we checked in on the “most hated man in America”, Martin Shkreli had just taken a $40 million hit on his E*Trade account.
That’s a problem for two reasons. For one thing, the account only had $45 million in it in the first place. For another, it was used to secure a $5 million bail bond after federal agents arrested everyone’s favorite pharma “bro” in December.
As it turns out, most of the account was apparently dedicated to shares of KaloBios, the tiny biotech Shkreli saved from bankruptcy in November when he acquired something like 70% of the float and promptly pulled the borrow, driving the price into the stratosphere.
His arrest drove the shares back into the dirt and the company filed Chapter 11 just over a month after Shkreli got involved. With KBIO now delisted and trading at at ~$2.20 a share, Shkreli’s account balance has plummeted.
He now faces the prospect of having to post new assets to secure his bond.
“Assets” like $2 million Wu-Tang Clan albums including “Once Upon A Time In Shaolin,” a one-of-a-kind double disk the only copy of which resides with Shkreli.
Now, even the Wu-Tang Clan has become a liability for Shkreli. “In a complaint filed on Tuesday in Manhattan federal court, Jason Koza said he never allowed his fan art depicting Wu-Tang members to be used in packaging for the hip-hop group’s ‘Once Upon a Time in Shaolin,’ the sole copy of which Shkreli bought,” Reuters reports. “Koza, 34, of Copiague, New York, said he thought his nine works would appear only on the website WuDisciples.blogspot.com.”
But they didn’t appear “only” on WuDisciples.blogspot.com, they turned up in the artwork for “Once Upon A Time In Shaolin” and Shkreli allowed drawings of Inspectah Deck, Ol’ Dirty Bastard and Raekwon to appear in an article on Vice.com.
Now, Koza wants some money.
“Mr. Koza was happy when his work appeared on the website,” a complaint filed in New York says. “Mr. Koza never granted a license for his works to be copied or displayed anywhere (else).”
“The Fashion Institute of Technology graduate now blames Wu-Tang leader Robert ‘RZA’ Diggs for including them in the ‘Shaolin’ album, and Shkreli for allowing three works to accompany a Jan. 29 article at Vice.com,” Reuters reports. Koza is seeking unspecified damages plus profits stemming from copyright infringement.
“He didn’t need to know the drawings were protected to be liable,” Koza’s lawyer told Reuters, referring to Shkreli.
Right.
Kind of like how he “didn’t need to know” that hiking the price of an AIDS drug by 5,000% would lead the public to brand him an “Ol’ Dirty Bastard” to understand he was making a morally objectionable decision.
- The Walking Dead: Something Is Rotten In The Banking System
Submitted by Pater Tenebrarum via Acting-Man.com,
A Curious Collapse
Ever since the ECB has begun to implement its assorted money printing programs in recent years – lately culminating in an outright QE program involving government bonds, agency bonds, ABS and covered bonds – bank reserves and the euro area money supply have soared. Bank reserves deposited with the central bank can be seen as equivalent to the cash assets of banks. The greater the proportion of such reserves (plus vault cash) relative to their outstanding deposit liabilities, the more of the outstanding deposit money is in fact represented by “covered” money substitutes as opposed to fiduciary media.
Euro area true money supply (excl. deposits held by non-residents) – the action since 2007-2008 largely reflects the ECB’s money printing efforts, as private banks have barely expanded credit on a euro area-wide basis since then- click to enlarge.
Many funny tricks have been employed to keep euro area banks and governments afloat during the sovereign debt crisis. Essentially these consisted of a version of Worldcom propping up Enron, with the central bank’s printing press as a go-between.
As an example here is how Italian banks and the Italian government are helping each other in pretending that they are more solvent than they really are: the banks buy government properties (everything from office buildings to military barracks) from the government, and pay for them with government bonds. The government then leases the buildings back from the banks, and the banks turn the properties into asset backed securities. The Italian government then slaps a “guarantee” on these securities, which makes them eligible for repo with the ECB. The banks then repo these ABS with the ECB and take the proceeds to buy more Italian government bonds – and back to step one. Simply put, this is a Ponzi scheme of gargantuan proportions.
Still, in view of these concerted efforts to reliquefy the banking system, one would expect that European banks should be at least temporarily solvent, more or less. Since they have barely expanded credit to the private sector, preferring instead to invest in government bonds, the markets should in theory have little to worry about.
Euro area bank loans to non-financial corporations, with annual growth rate (blue line) – click to enlarge.
In fact, on account of new capital regulations, European banks are almost forced to amass government securities – as government bonds have been declared to represent “risk-free” assets, which reveals an astounding degree of chutzpa on the part of European authorities in the wake of the sovereign debt crisis.
This makes one wonder why the Euro Stoxx Bank Index suddenly looks like this:
The Euro Stoxx bank index has been in free-fall since July – click to enlarge.
Clearly, something is rotten here – but what?
Bail-Ins, Dud Loans, Insolvent Zombies and Hidden Risks
Back in September last year, with the bank index still close to its highs of the year, we referred to European banks as “Insolvent Zombies”. This may have sounded a bit uncharitable at the time, but it is beginning to look like an ever more accurate description by the day. In December, we reminded readers that European banks are still sitting on €1 trillion in non-performing dud loans (see “Still Drowning in Bad Loans” for details).
In January we finally got around to write about the new European “bail-in” regulations, noting that these were bound to bring about unintended consequences. We pointed out that while there is absolutely nothing wrong with exposing bank creditors to risk and sparing taxpayers from involuntarily shouldering same, such an approach would over time likely prove completely incompatible with a fractionally reserved banking system – especially one as highly leveraged and teetering on the brink as that in a number of European countries.
We moreover pointed out that some governments have begun to apply the new regulations in rather arbitrary fashion – for instance as a means to escape guarantees they themselves have extended to creditors. Two recent bank collapses in Portugal and the still festering Heta (formerly HAA) wind-down in Austria served as recent examples.
This seems indeed to be on the minds of investors, who have begun to sell convertible and subordinated bank bonds left and right. And in concert with the decline in bonds and stocks, risk measures like CDS spreads on senior bank debt have begun to surge. Below are several charts we have taken from a recent article by Peter Tchir, who has commented on the situation at Forbes.
iTraxx senior financials CDS index – this index tracks CDS spreads on the senior debt of 30 major financial institutions – click to enlarge.
Deutsche Bank CoCos: these convertible bonds have special features that allow for “automatic” conversions and the suspension of coupon payments, making them eligible as tier 1 capital under Basel 3. Investors have liked this instruments – until they suddenly stopped liking them.
Mr. Tchir agrees that the arbitrary manner in which bail-ins have been pursued – especially the overnight bail-in of senior creditors of BES by the Portuguese government’s decision to reassign five different bonds from the “good bank” to the “bad bank” ad hoc – must have contributed to investors getting cold feet.
However, he also argues that Mr. Draghi can surely be relied upon to keep Europe’s zombie banks in a state of suspended animation, and that the surge in CDS spreads is so far not much to worry about, at least if compared to where they went in the last crisis period – as the long term chart below shows:
5 year CDS spreads on senior bank debt, long term: Deutsche Bank (yellow line), Mediobanca (green line), Credit Suisse (orange line) and Societe Generale (blue line) – click to enlarge.
We would however note that this is precisely how it started last time around as well. The fact that CDS spreads have not yet moved even higher doesn’t seem a good reason not to be concerned. As far as Mr. Draghi’s abilities to keep the zombies staggering about are concerned, point taken – they are certainly formidable, as demonstrated by the Italian snow-job we have described above.
However, the ECB can certainly not jump in and “rescue” individual institutions that are in trouble – it can merely hope to keep up confidence in the debt-laden system as a whole. Banks that are beneath its notice due to not being regarded as “systemically relevant” are out of luck in any case – they are prime bail-in material, as Italian bank creditors have just found out to their chagrin.
Many of said creditors in Italy were small savers who were talked into buying subordinated bank bonds by their own house banks (the same thing has previously happened in Spain as well). Why have their banks talked them into taking such risks? The new bank regulations are in fact the main reason! European regulators have wittingly or unwittingly promoted the transfer of bank risk to widows and orphans – literally.
Italy’s negative TARGET-2 balances have begun to deteriorate sharply again, likely indicating growing capital flight – click to enlarge.
We confess we are a bit more worried than Mr. Tchir seems to be at the current juncture. After all, we regard the euro area crisis as being in suspended animation as well, in a sense. The essential problems haven’t been resolved, they have merely been papered over – with truly staggering amounts of paper and promises. In the course of this giant contingent liabilities have piled up on the balance sheets of euro area governments, several of which are guaranteeing the debt of others while being the subjects of debt guarantees at the same time, due to their de facto insolvency.
However, this is not the only thing that worries us. Apart from the astonishing €1 trillion in dud loans that remain on European bank balance sheets in spite of serial bail-outs and the erection of numerous “bad bank” structures into which such loans are “disappeared” so as not to mar the statistics any longer, one must keep in mind that economic confidence has been crumbling for almost two years:
The huge increase in the ratio of gold to commodities, which has begun to rise concurrently with the beginning of the sharp rise in junk bond yields, is a sign that economic confidence is crumbling – click to enlarge.
Prior to the last crisis, European banks were known to be among the largest financiers of commodity traders and Asian emerging market companies. We have a strong suspicion that this hasn’t magically changed in recent years, especially as the EM and commodity universe seemed to be fine again for several years once Mr. Bernanke started up his printing press and China pumped up its money and credit supply like a drunken sailor in the wake of the 2008 crisis.
Well, they are no longer fine. In fact, the debt of commodity producers and emerging market companies has been plunging to distressed levels at warp speed since the middle of last year. This is likely to get worse if China is forced to “let the yuan go” (just to be safe, put down your coffee before clicking on the link).
Then there is the fact that banks perforce remain exposed to what occurs in financial markets. Their proprietary portfolios have shrunk, but that doesn’t mean they don’t remain intertwined with the markets through all sorts of funding channels, including numerous opaque ones in the shadow banking system. The problem with this is that confidence is very fragile, and credit stress often emerges from entirely unexpected places (as e.g. happened in 2008).
Conclusion
It is possible that we are worrying too much – after all, both European and US banks have certainly taken a lot of action to shore up their capital. However, it seems to us that the next wave of economic troubles is already washing ashore before they had a chance to fully recover from the last crisis. Obviously, not all banks are affected by this to the same extent, but the banking system is deeply interconnected, so even institutions that appear relatively insulated from the currently brewing set of problems may actually suffer damage if things get out of hand.
All signs are that things are in fact in danger of getting out of hand, even if it seems to us as though it is time for at least a brief pause in the mini panic in risk assets we have observed in recent weeks. This is just a reminder that oil prices and the yuan are not the only things on the minds of market participants at the moment. As is seemingly always the case, when it rains, it pours.
- Nasdaq Volatility Spikes As "Exuberance Has Turned To Panic"
With the "generals" finally meeting their reality-maker, investors appear to be questioning the DotCom bubble-like highs as momentum collapses. "Exuberance has turned to panic pretty quickly," notes one asset manager and after a very rapid plunge in recent days, options traders are piling into protection at a pace not seen since Q4 2008.
The Nasdaq-S&P implied vol spread is more than double its 5 year average…
(ignore the spikes as they represent rolls as opposed to trends)
As Bloomberg reports, options traders are betting the pain is far from over in the Nasdaq 100 Index, driving the cost of protection to its highest relative to the S&P since the middle of the financial crisis in 2008.
It’s the latest exodus from risk in the U.S. equity market, with selling that started in energy shares spreading to everything from health-care to banks. Technology companies, which until recently had been spared because of their low debt burden and rising earnings, joined the rout as investors focus on elevated valuations among the industry’s biggest stocks.
“Exuberance has turned to panic pretty quickly,” said Stephen Solaka, managing partner of Belmont Capital Group in Los Angeles, which oversees about $400 million. “Technology stocks have had quite a run, and now they’re seeing momentum the other way.”
Options are signaling more trouble ahead just as professional speculators dump bullish wagers on the group. Hedge funds and large speculators have pared back their long positions on the Nasdaq 100 for a fourth week out of five, data from the Commodity Futures Trading Commission show.
“Tech names had become a crowded long, and now we are seeing the unwind,” said Pravit Chintawongvanich, a New York-based derivatives strategist at Macro Risk Advisors. “Investors are willing to pay up for protection in tech and growth names. It is probably justified. You could see this volatility spread widen even further.”
Even after a 16 percent plunge from a record in November, Nasdaq 100 companies still trade at 16.3 times projected profits, higher than the S&P 500’s 15.4 ratio. Scott Minerd, chief investment officer for Guggenheim Partners LLC, said in an interview that technology stocks will tumble even further this year as investors flee to safety and buyers stay on the sidelines.
- Australia Admits Recent Stellar Job Numbers Were Cooked
Two months ago the Australian media, which unlike its US counterpart refuses to be spoon fed ebullient economic propaganda, called bullshit on the spectacular October job numbers, when instead of adding 15,000 jobs as consensus expected, Australia’s Bureau of Statistics reported that a whopping 58,600 jobs had been added. We covered this in “Australian Media Throws Up All Over ‘Stellar’ Jobs Report: “Don’t Believe The Jobs Figures!”
One month later, the situation got even more ridiculous, when instead of the expected 10,000 drop in November, the “statistical” bureau announced that 71,400 jobs had been added, the most in 15 years, and the equivalent of 1 million jobs added in the US. Once again the local media cried foul as we documented in “Australian Media Throws Up All Over ‘Stellar’ Jobs Report, Again”
Indicatively, for a sense of how grotesque the jobs “data” was, the chart below shows that while the October report was a 6-sigma beat, the November was an even more laughable 8-sigma.
Two months later we find that the media, and all those mocking the government propaganda apparatus, were spot on, because moments ago today, Australia Treasury Secretary John Fraser, during testimony to parliamentary committee, admitted that jobs growth for the two months in question “may be overstated.” What’s the reason? The same one the propaganda bureau always uses when its lies are exposed: “technical issues”, the same explanation the Atlanta Fed used in its explanation for a strangely belated release of its GDP Now estimate one month ago.
Here’s Bloomberg with more:
Australia has had some technical issues with its labor data, which “look a little bit better” than would otherwise have been the case, the secretary to the Treasury said, commenting on record employment growth in the final quarter of 2015.
John Fraser, the nation’s top economic bureaucrat, told a parliamentary panel in Canberra Wednesday that he held discussions on the employment figures with the chief statistician this week. He didn’t elaborate on the meeting but said the recent strength in the jobs market is encouraging.
There were some “technical issues” in October and November that may have made the employment figures “look a little bit better than otherwise would be the case,” he said. The technical issues relate to “rolling off” of participants in the labor survey.
Australia’s economy added 55,000 jobs in October and a further 74,900 in November, before shedding 1,000 in December to produce the record quarterly gain. Questions regarding the accuracy of the data have been raised following acknowledgment by the statistics agency in 2014 of measurement challenges.
Why the sudden admission it was all a lie? Simple: weakness in commodity prices “is far greater than people had been expecting,” Fraser said in earlier remarks to the panel. Australia is now “swimming against the tide” because of uncertainties in the global economy, he added.
Translation: “we need more easing, and to do that, the economy has to go from strong to crap.” And with the Australian economy suddenly desperate for lower rates from the RBA, one can ignore the propaganda lies, and focus once again on the far uglier truth.
Which makes us wonder: with the Yellen Fed in desperate need of political cover for relenting on its terrible rate hike strategy, and once again lowering rates to zero or negative, a recession – something JPM hinted at yesterday – will be critical. And what better way to admit the US has been in one for nearly a year than to drastically revise all the exorbitant labor numbers over the past 12 months.
You know, for “technical reasons”…
- If Knowledge Is Power, Is It Also Wealth?
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
Ironically perhaps, the ideas that are scarce are those that disrupt "business as usual" by automating what has not yet been automated.
Let's consider a syllogism: Knowledge is power, power equals wealth, so knowledge equals wealth.
Is this true? Author George Gilder thinks so. His book Knowledge and Power: The Information Theory of Capitalism and How it is Revolutionizing our World, proposes that (in Bill Bonner's apt phrase) "the economy is fundamentally a learning system, not a way for distributing wealth."
In Gilder's view, new information (i.e. knowledge) enables us to do things better, i.e. increase productivity. New knowledge is what creates value.
New knowledge is always surprising, and it naturally disrupts "business as usual." So those earning money from business as usual must suppress the disruption arising from new knowledge to maintain their incomes/profits.
Bonner summarizes the conflict between vested interests (cronies and zombies) and those with new knowledge in this lively fashion:
"In an economy, the person who is the source of most important new information is the entrepreneur. He is the fellow who takes risks and builds a new business.
The cronies want to stop him, before he undermines the value of their old assets and old business models with new information. The zombies want to drag him down, leeching on him so greedily that he runs out of energy."
Gilder views vested interests limiting new knowledge as the real threat to the economy. This is the danger of "regulatory capture," when vested interests bribe the state (government) to erect barriers to competition to maintain monopolies and rentier privileges.
But what's missing from this view of the economy as a learning system is that value flows to what's scarce, and information is abundant.
In other words, only very specific kinds of knowledge are scarce–the kind that create new goods, services and business models.
These new models are precisely what destroys not just "bad" cronyism but "good" jobs. What's scarce is ideas that automate existing processes.
As Michael Spence and co-authors Andrew McAfee and Erik Brynjolfsson observed in their 2014 essay, Labor, Capital, and Ideas in the Power Law Economy, neither capital nor labor have scarcity value in the age of automation and nearly-free credit.“Fortune will instead favor a third group: those who can innovate and create new products, services, and business models.”
Value in the knowledge economy is not distributed equally. The return on abundant human labor and capital are very low, while the scarcity of skills and knowledge that create new products, services, and business models drives most of the gains to the creative class: “The distribution of income for this creative class typically takes the form of a power law, with a small number of winners capturing most of the rewards. In the future, ideas will be the real scarce inputs in the world — scarcer than both labor and capital — and the few who provide good ideas will reap huge rewards.”
Learning–the acquisition of skills and knowledge–is difficult and costly. Developing new ideas and applying them in the real world is an uncertain process and therefore risky.
From this perspective, rewards flow not just to what’s scarce but to what is inherently risky. Since most ideas fail to reach fruition, new ideas that succeed in boosting productivity are intrinsically scarce.
In other words, there is no risk-free way to identify and exploit scarcity in a knowledge economy in which vast troves of information and knowledge are free and have no scarcity value.
The wild card here is knowledge is increasingly unownable and therefore it cannot be kept scarce for private gain.
It seems that while knowledge may be powerful in terms of empowering the learner to improve their own lives, knowledge can only generate wealth if it is scarce and ownable.
Ironically perhaps, the ideas that are scarce are those that disrupt "business as usual" by automating what has not yet been automated.
- Sweden Arrests 14 For Plotting To Attack Migrant House With Axes, Iron Pipes
The Swedes are aggravated with Mid-East migrants.
With the highest per capita rate of sheltered asylum seekers in Europe, Sweden has become something of a poster child for migrant mischief.
In the wake of the sexual assaults that swept the bloc on New Year’s Eve, the world is suddenly focused on Sweden, where some say police conspired to cover up a series of attacks that allegedly occurred in central Stockholm’s Kungsträdgården last August and where a 22-year-old aid worker was recently stabbed to death by a Somali migrant.
The backlash in the country is palpable and recently manifested itself in a move by the “football hooligan” crowd to stage an assault on Stockholm’s main train station where dozens of Moroccan migrant children are apparently camped out.
On Tuesday, in the latest sign that Swedes are becoming increasingly fed up with their government’s policy on refugees, more than a dozen people were arrested for planning an attack on an asylum center. Apparently, the men were plotting to use “axes, knives, and iron pipes” against a refugee shelter in Nynashamn, which is located some 60 kilometres (37 miles) south of Stockholm.
“Swedish police said Tuesday they had arrested 14 men for allegedly planning to attack an asylum centre after finding axes, knives and iron pipes in their cars,” France 24 reported.
“We believe that the migrant centre was the target of the attack,” a police spokesman Hesam Akbari told AFP. Here’s more from The Local:
Officers rounded up 14 people on Monday night in cars close to the asylum accommodation that is thought to have been the intended target of the plot.
Batons, knives, iron bars and axes were found in the suspects’ vehicles.
Hesam Akbari, a spokesperson for Stockholm police, told the TT news agency that members of the group were facing a number of charges.
“The (police) report now concerns three offences. Preparation for aggravated assault, incitement to aggravated assault and incitement to aggravated arson,” he said.
The editor of Swedish anti-racism magazine Expo, Mikael Färnbo, told TT that they have previously observed close links between far-right communities in Sweden and Eastern Europe.
“In general terms alone we can say that we know that there are connections,” he said.
Who knows what these 14 men were planning on doing, but the fact that they apparently had “axes, knives, and iron pipes” stashed in their vehicles certainly seems to suggest that something nefarious was likely in the cards.
Swedish Radio said the men may have been members of “right-wing groups.”
You’re reminded that the far-right has witnessed something of a resurgence over the past nine or so months in Europe as citizens become increasingly leery of Mid-East refugees. PEGIDA staged bloc-wide protests on Saturday and in Finland, the “Soldiers of Odin” are proof positive that nationalism is alive and well. In Bavaria, a carnival float made to resemble a Nazi tank read: “Asylum defense.”
We’ve long said that it’s just a matter of time before the bevy of bad migrant news sparks an outright rebellion among Europeans who are increasingly fed up with the effort to integrate millions of asylum seekers fleeing the violence that besets the Mid-East.
It’s not that Western Europe isn’t compassionate. The bloc’s citizens have simply determined that between the Paris attacks, the New Year’s Eve sexual assaults, and the murder of Alexandra Mezher, enough is enough with the whole multicultural utopia ideal.
As the “football hooligan” incident underscores, it’s only a matter of time before a violent attack on refugees occurs, if not in Sweden, then in Germany, or in Austria where officials are literally prepared to pay migrants €500 to go back to where they came from because nothing says “scapegoating xenophobia” like a trunk full of “axes, knives, and iron pipes.”
Oh, and the punchline to the whole thing: all 14 suspects were carrying foreign ID papers.
- Platinum and Palladium Analysis (Video)
By EconMatters
We look at Platinum and Palladium metals from the technical side in this video. These often neglected metals are pretty unique and special in their own right, and can offer some great trading setups.
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- As Goldman Risk Explodes, President Says "No One Should Question Viability Of US Banks"
You know it's serious when the denials begin. Speaking in a Bloomberg TV interview, Goldman Sachs President Gary Cohn explained how "US banks took their medicine early," adding that "some European banks have been slow getting recapitalized." Having thrown his 'competitors' across the ocean under the bus, Cohn then unleashed his comments with regard Goldman's own spiking credit risk – demanding that "no one should question the viability of US banks."
- *COHN: U.S. BANKS ‘TOOK OUR MEDICINE EARLY’
- *COHN: U.S. BANKS DELEVERAGED AND HAVE ENORMOUS EXCESS LIQUIDITY
- *COHN: SOME EUROPEAN BANKS HAVE BEEN SLOW GETTING RECAPITALIZED
- *COHN: NO ONE SHOULD QUESTION THE VIABILITY OF U.S. BANKS
Goldman risk is soaring…
We wonder how long before any discussion of stress in the banking system will be deemed "hate speech" and be deleted from the propaganda stream?
- Falling Oil Prices Not The Reason For America's Economic Woes
Submitted by Antonius Aquinas via Acting-Man.com,
Why Should a Decline in Oil Prices be Bad?
The dramatic fall in the global price of oil is being cited by the financial press, government officials, and academia as the catalyst for the recent abysmal U.S. economic data which shows that the economy is, in all likelihood, sliding into a recession or worse.
Oil prices in dire straits…
While falling oil prices sound like a plausible explanation for the abysmal financial numbers, anyone with a modicum of economic sense (which excludes much of the financial Establishment) can see that it is merely a smokescreen to obfuscate the real culprit.
The fall in oil prices, while detrimental to many oil producers, should actually be a boon for the rest of the economy, especially those industries that are heavily reliant on energy. Lower fuel prices mean lower production costs leading to, ceteris paribus, greater output.
The price of gasoline has declined precipitously – click to enlarge.
For consumers, lower oil prices mean lower utility bills and cheaper gasoline, both of which mean more disposable income for either savings or more consumption. Why would greater disposable income lead to a recession?
Naturally, lower prices are not good for oil producers. But a decline in one sector of the economy (albeit an important one), does not lead to a general collapse. While the energy sector may be contracting, industries that use fuel should be able to expand as their production costs fall.
What constitutes great news in oil exploration nowadays
The Pseudo-Prosperity of the Printing Press
The Federal Reserve’s Quantitive Easing (QE), Zero Interest Rate Policy (ZIRP), Operation Twist (OT), and their variations have created a massive bubble in asset prices which is now beginning to burst. All of these polices have been undertaken to save the banking system from collapse after the crisis of 2008. Since the start of the Great Recession, none of the problems that have led to it have been addressed.
Not only has the stock market been artificially inflated by the Federal Reserve, but it has come at a devastating cost in the decimation of savers, as the return on their money has dropped to next to nothing. This, of course, has had debilitating consequences on retirees and seniors.
Broad US money supply TMS-2 and the Federal Funds rate – click to enlarge.
The Obama Administration, with little opposition from Republicans, has increased the federal deficit to nearly $20 trillion from the $9 trillion it had inherited with little or no hope of any reduction. Its wasteful stimulus program of a few years ago has done nothing to improve conditions while its collectivist health care initiative has placed crushing burdens across the economic spectrum.
What is even scarier is that Obama is apparently clueless about current economic conditions, as he mindlessly demonstrated in his (thankfully) last State of the Union Address:
“Anyone claiming that America’s economy is in decline is peddling fiction. What is true – and the reason that a lot of Americans feel anxious – is that the economy has been changing in profound ways, changes that started long before the Great Recession hit and hasn’t let up.”
Obama is correct in one sense: there is a “profound change” that is happening in the economy, however, it is a change for the worse which he and his harmful policies have created.
Federal debt since the 1990s – Obama took office in January 2009 – click to enlarge.
Not surprisingly, in their rebuttal to the speech, the Republicans offered little in substance. Instead, they chose a spokesperson whose only claim to fame was her infamous decision as governess of South Carolina to remove the Confederate flag from state buildings. Needless to say, the choice of Nikki Haley met with disgust among the party’s base. The GOP is not called the “stupid party” for nothing!
Unfortunately, for the vast majority of Americans, there is little likelihood that the present Administration or the next, be it of a different party, will turn things around. Instead, there will probably be more of the same.
Until there is a change in ideology where the corrupt notions of money and credit creation via the printing press and the running of gargantuan deficits are debunked, American living standards will never improve.
- What's Dragging Down European Banks: Oil And Commodity Exposure As High As 160% Of Tangible Book
Yesterday, when looking at the exposure of the Canadian banking sector to energy, we found something disturbing: according to an RBC analysis, local banks were woefully underreserved.
Yet while clearly overly optimistic about the severity and the duration of the commodity crunch, at least Canada’s banks do provide some information, which however is more than can be said about most European banks. As Morgan Stanley writes, “Europeans have not typically disclosed reserve levels against energy exposure, making comparison to US banks challenging. Moreover, quality of books can vary meaningfully. For example, we note that Wells Fargo has raised reserves against its US$17 billion substantially non-investment grade book, while BNP and Cred Ag have indicated a significant skew (75% and 90%, respectively) to IG within energy books. Equally we note that US mid-cap banks typically have a greater skew to higher-risk support services (~20-25%) compared to Europeans (~5-10%) and to E&P/upstream (~65% versus Europeans ~10-20%).”
Morgan Stanley then proceeds to make some assumptions about how rising reserves would impact European bank income statements as reserve builds flow through the P&L: in some cases the hit to EPS would be .
A ~2% reserve build in 2016 would impact EPS by 6-27%, we estimate:We believe noticeable differences exist between US and EU banks’ portfolios in terms of seniority and type of exposure. As such, applying the assumption of a ~2% further build in energy reserves in 2016, versus ~4% assumed for large US banks, we estimate that EPS would decline by 6-27% for European-exposed names (ex-UBS), with Standard Chartered, Barclays, Credit Agricole, Natixis and DNB most exposed.
Marking to market of high yield and lower DCM/credit trading is also likely to be an issue (and we forecast FICC down ~5% in 2016):We previously showed that CS had the biggest percentage of earnings from HY and already had the worst of peers YoY FICC in 3Q, which we fear could continue to drag, despite a vigorous focus on restructuring.
A matrix of boosting reserves would look as follows on bank EPS:
But the biggest apparent threat for European banks, at least according to MS calulcations, is the following: while in the US even a modest 2% reserve on loans equates to just 10% of Tangible Book value…
… in Europe a long overdue reserve build of 3-10% for the most exposed banks, would immediately soak up anywhere between 60 and a whopping 160% of tangible book!
Which means just one thing: as oil stays “lower for longer”, and as many more European banks are forced to first reserve and then charge off their existing oil and gas exposure, expect much more diluation. Which, incidentlaly also explains why European bank stocks have been plunging since the beginning of the year as existing equity investors dump ahead of inevitable capital raises.
And while that answers some of the “gross exposure to oil and commodities” question, another outstanding question is what is the net exposure to China. As a reminder, this is what Deutsche Bank’s credit analyst Dominic Konstam said in his explicit defense of what needs to be done to stop the European bloodletting:
The exposure issue has been downplayed but make no mistake banks are heavily exposed to Asia/MidEast and while 10% writedown might be worst case for China but too high for the whole, it is what investors shd and do worry about — whole wd include the contagion to banking hubs in Sing/HKong
Ironically, it is Deutsche Bank that has been hit the hardest as the full exposure answer, either at the German bank or elsewhere, remains elusive; it is also what has cost European banks billions (and counting) in market cap in just the past 6 weeks.
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