- THe RuSSiaNS ARe CoMiNG…
- If You Are For Peace, You Are A Russian Agent!
Authored by Paul Craig Roberts,
Speaking of fake news, the latest issue of the National Enquirer at the supermarket checkout is giving the mainstream presstitute media a run for the money: “Castro’s Deathbed Confession: I Killed JFK. How I framed Oswald.”
That’s almost as good as the fake news going around the presstitute media, such as the TV stations, the Washington Post, New York Times, and Guardian – yes, even the former leftwing British newspaper has joined the ranks of the press prostitutes – that the CIA has concluded that “Russian operatives covertly interfered in the election campaign in an attempt to ensure the Republican candidate’s victory.”
If the CIA is actually stupid enough to believe this, the US is without a competent intelligence agency. Of course, the CIA didn’t say and doesn’t believe any such thing. The fake news stories in the presstitute media are all sourced to unnamed officials. Former British ambassador Craig Murray described the reports accurately: “bullshit.”
So who is making the stories up, another anonomous group tied to Hillary such as PropOrNot, the secret, hidden organization that released a list of 200 websites that are Russian agents?
Fake news is the presstitute’s product. Throughout the presidential primaries and presidential campaign it was completely clear that the mainstream print and TV media were producing endless fake news designed to damage Trump and to boost Hillary. We all saw it. We all lived through it. What is this pretense that Russia is the source of fake news?
We have had nothing but fake news from the presstitutes since the Klingon regime. Fake news was used against Yugoslavia and Serbia in order to cloak the Clinton’s war crimes.
Fake news was used against Osama bin Laden, Afghanistan, Iraq, Pakistan, Yemen, and Somalia in order to cloak the Bush regime’s war crimes.
Fake news was used against Libya and Syria in order to cloak the Obama regime’s war crimes.
Without fake news these three blood-drenched presidencies would have been hauled before the War Crimes Commission, tried, and convicted.
Can anyone produce any truthful statement from the presstitute media about anything of importance? MH-17? Crimea? Ukraine?
Ironic, isn’t it, that it is those who purport to be liberal and progressive who are responsible for the revival of McCarthyism in America. Moreover, the liberal progressives are institutionalizing McCarthyism in the US government. There is clearly a concerted effort being made to define truth as fake news and to define lies as truth.
Ironic, isn’t it, that it is the war criminal Hillary, responsible for the destruction of Libya and the near destruction of Syria until the Russians intervened, that the liberal progressive forces are desperate to have as president. Not only did the liberal progressive forces attempt to elect a war criminal president of the US, they are doing their best to delegitimize the president-elect who opposes the orchestrated conflict with Russia.
Ironic, isn’t it, that the liberal progressive bloc refuse to give peace a chance.
The faked news report from the imbeciles at PropOrNot, which was hyped by the fake news sheet, WaPo, claiming that I was a Russian agent was supposed to do my credibility harm. Instead, the 200 List told everyone where they could get good information, and my readership went up. Moreover, I almost got a Russian passport out of it. But before sending it along, Putin checked with Russian intelligence and was informed that I am not on their roster.
The rumor is that if the House intelligence bill passes with Title V intact, those of us on the PropOrNot list could be called before congressional hearings in a replay of McCarthyism. If they waterboard me, I might breakdown and implicate Ronald Reagan, George H.W. Bush, Jim Baker, David Stockman, and all the rest. The evidence against us is pretty strong. Trump is suspect because he wants peace with Russia, and so did Reagan. From the standpoint of the Hillary forces and the presstitutes, anyone who wants peace with Russia is bound to be a Russian agent.
The way the presstitutes have framed the issue, there are no legitimate reasons to be for peace.
If Putin and those of us on the 200 List are the ones who actually got Trump elected, shouldn’t Putin or The List be Time magazine’s person of the year and not Trump? After all, if Putin and I did the work, shouldn’t we get the recognition? Why give the credit to the stooge we put in office?
Why is Time magazine shoving those of us responsible off into the background?
Eureka! Time magazine is also a Russian agent and is covering up for us by giving Trump credit for our work. Whew! I won’t be waterboarded after all.
- Foxconn Fires 25% Of India Workers As Demonetization Destroys Sales
While piecemeal anecdotes and surveys have already exposed the devastation that PM Modi's demonetization plan has had on the Indian economy, tonight we see the first hard evidence as Foxconn has asked 25% of its workforce to leave after the cash ban caused sales to collapse by 50% forcing the company to slash production by half.
Amid social unrest and loss of faith in the nation's currency, India's economy has ground to a halt with its Composite PMI crashing by a record in the last month as demonetization strikes.
And now, as The Economic Times reports, the government’s move to ban Rs 500 and Rs 1,000 notes from November 9 has had a domino effect on the mobile phone industry, where a large majority of mobile phones are bought for less than Rs 5,000 and most of the transactions happen through cash.
Consumer purchase power has been reduced dramatically – mobile phone monthly sales halved to Rs 175-200 crore post demonetisation – and sales revival is not looking up, as was perceived earlier, industry insiders said.
Leading local players including Intex, Lava and Karbonn are planning to lay off or bench 10-40% of their workforce, as they cut production to control inventory pile-ups in retail channels with consumers delaying cash purchases after Nov 8 demonetisation sucked out cash from the market.
Lava is shutting down its plant – which employs around 5000 people -for a week starting December 12, while others could soon follow, industry insiders said.
Foxconn – which makes devices for China’s Xiaomi, Oppo and Gionee, besides Infocus and Nokia – along with Lava, Intex, Karbonn and Micromax account for around 50% of the handsets assembled in India, say experts.
“The four plants in Sri City (Andhra Pradesh) are operating at 1.2 million capacity a month, down from 2.5 million that it has,” a senior industry executive aware of Foxconn’s manufacturing details said, asking not to be named. The company has put about 1,700 of its workforce on the bench, or on forced leave for two weeks during which they will get paid but the number of days would be cut from their earned leaves. Benching may continue if production – directly related to consumer demand – does not come to the 2 million a month levels by January, the person added.
Will the workers come back? Will production come back? Well as we noted previously, Modi's move has shaken faith in the foundations
A final philosophical point. Our entire monetary system depends on trust. A banknote is a piece of paper that says the RBI will give the bearer another similar piece of paper, or make an entry in an electronic ledger for that amount. The system works because everybody believes that those pieces of paper will be accepted by everybody else and therefore, money serves as an useful medium of exchange. This move has shaken that trust.
- Saudi "Shock And Awe" Sparks Buying Panic In Crude – WTI At 17-Month Highs
Despite Saudi Arabia pumping record amounts of crude, the energy complex has spiked 6% higher tonight after two major headlines. First, Russia and other non-OPEC nations agreed to join the OPEC pledge to reduce production; and then, in what some are calling their "whatever it takes" moment, Saudi Arabia surprised the market by saying it will cut more than previously agreed.
Saudi Arabia will “cut substantially” below the target agreed last month with OPEC members, Energy Minister Khalid Al-Falih says.
Al-Falih’s comments follow a deal by non-OPEC countries to join forces with the group and trim output by 558k b/d next year, the first pact between the rivals in 15 years.
“This is a very powerful message that producers want to balance the market higher,” says Chris Weston, chief market strategist in Melbourne at IG Ltd. “As a statement of intent, this is about as bullish as it gets”
Oil spiked up to its highest since July 2015…
and perhaps most worrying for those inflation-watchers, is up 55% YoY…
"This is shock and awe by Saudi Arabia," said Amrita Sen, chief oil analyst at Energy Aspects Ltd. in London. "It shows the commitment of Riyadh to rebalance the market and should end concerns about OPEC delivering the deal."
The question is – what happens next? How long can the Saudis keep jaw-boning the market higher in true central bank-inspired 'forward guidance' before 'investors' get wise to them not actually cutting production?
- Speculation Grows Japan Will Tighten Next
First it was the Fed, then the ECB (which last week tapered when it reduced the monthly amount of bond purchases under its QE program). Now attention shifts to the Bank of Japan, because as the WSJ writes, one of central banking’s most aggressive easers – Kuroda’s Bank of Japan – may soon have to think about tightening for the first time since 2007.
While it has yet to permeate the markets (confirmation would send the Yen soaring), the latest buzz in Japanese monetary-policy circles is that the BOJ may have to lift the 10-year government-bond target from a recently set zero, in the process tightening financial conditions even more. Indeed, as the WSJ notes, such a changed view on BOJ policy is quite a turnaround.
Just a few months back investors and economists world-wide were discussing what would be the next easing steps in the bank’s 15-year fight to boost the economy and produce inflation. More certainly seems needed: Japan’s economy grew more slowly than expected in the latest quarter and prices are falling.
So why switch gears now? Blame Donald Trump, stupid, whose miraculously adverse impact on the Yen has been more profound than either of Japan’s recent QEs…. and that is before Trump is even inaugurated, or reveals any of the details behind his fiscal stimulus plans.
The U.S. dollar and Treasury yields have been climbing since soon after Trump was elected president on Nov. 8, triggered by expectations that his policies would boost U.S. growth, inflation and interest rates. So far, that has been good for Japan, where the weaker yen is brightening exporters’ prospects, helping send Tokyo stocks to 11-month highs. A weaker yen bolsters their bottom lines by making their products cheaper overseas and inflating the value of repatriated income. As of Friday, one dollar buys ¥114.50, 9.6% more than the day before the U.S. election.
While that may be fine as far as it goes, according to various central-bank watchers who spoke to the WSJ, the BOJ’s latest easing policy raises the risk of far greater, and potentially damaging, depreciation. That is because as a result of the curve “anchoring”, the wider the yield spread between JGBs and foreign bonds, the greater the outflows, the more aggressive the selling of the Yen. For example, since U.S. Election Day, U.S. 10-year Treasury yields have risen to 2.426% from 1.862%, far outstripping the Japanese benchmark bond’s rise to 0.056% from minus 0.064%.
As yields rise around the world—led by the U.S., whose Federal Reserve is expected to raise rates on Dec. 14—the gap between Japan and other markets widens. That draws money out of Japan as investors search for better returns, which puts further pressure on the yen.
So what happens if US TSY yields spike even higher (the 10Y was at 2.493% moments ago, the highest since June 2015)? Should 10Y yields climb to 3% or higher next year, as some economists think it could, “the BOJ may be forced to raise its yield target in response, even if it hasn’t achieved its policy goal of 2% inflation.“
The pressure to raise the target could be especially intense if the yen weakens to levels like ¥130 to the dollar.
While for those who believe an imploding yen is what the doctor ordered, referencing Abe’s plan to goose the economy with easy money, there are notable downsides.
Sure, a weaker yen could boost optimism and inflation expectations among Japanese companies, argues Abe adviser Etsuro Honda, making them more willing to invest and raise wages. If the result was increased upward pressure on bond yields, the “natural course of action” would be for the BOJ to raise the 10-year yield target a touch from zero, he said. Two months ago Mr. Honda was calling on the BOJ to lower its targets as an added jolt of easing.
However for Abenomics skeptics, the yen’s deteriorating prospects ring alarm bells. BNP Paribas chief Japan economist Ryutaro Kono said in a recent note for clients that a fall to ¥115 to the dollar could upset consumers by raising the cost of living.
The Yen is already below that level.
When BOJ easing weakened the yen to ¥125 to the dollar from ¥110 between autumn 2014 and summer of 2015, it cast a chill over the economy as rising costs for imported food and necessities battered consumers while companies held back from raising wages.
Then there is the yield curve argument: Japanese economists say the BOJ may have to raise its bond-yield target just to give more breathing room to the country’s banks, whose profits are dwindling as their longer-term lending rates fall dangerously close to what they’re paying on deposits.
“It’s like they’re submerged under water and holding their breath,” said Kazuo Momma, a former BOJ executive director who is now executive economist at Mizuho Research Institute. “If this situation becomes protracted, they could drown.”
Naturally, the BOJ – just like the ECB – which are both agreeable to steepening the yield curve even more (seemingly unaware that will also crash the housing market), is allergic to any discussions of tightening. After all, if there is one thing that could crash this market, it is further hints of tightening and the yanking of billions in reserves. Then again, just like in the case of the ECB, perhaps all Kuroda needs to do is come up with a fancy-sounding economic name for its imminent tightening, one which doesn’t wake up the algos. Perhaps “inverse massive QE” should do the trick…
- Russia Releases First Ever Video Footage Of Its Special Forces Operating In Syria
In a first of its kind event, Russian television today showed what it says is the first footage of Russian special forces fighting on the ground in Syria.
Elite Russian units in Syria take part in search and rescue operations, assassinations of key rebel figures and coordination of air strikes, according to footage broadcast on state-owned channel Rossiya 24 on Sunday. Groups of heavily armed soldiers were shown coordinating sniper attacks, using robotic tanks and inspecting rebel corpses.
The presenter of the weekly news program said the footage was filmed in Syria but did not give details.
Russia first acknowledged the presence of its special forces in Syria during the re-capture of the city of Palmyra from Islamic State fighters in March, but it has provided no information on the number of deployed soldiers or their exact location.
The video shows more than 8 minutes of fascinating footage which reveals that traditionally the most impactful developments “on the battlefield” take place just behind the scenes.
And now we wait for similar footage from US special forces in Syria – after all, it is now effectively a contest – and hope that the Russian and US teams never “confuse” each other for the enemy. Meanwhile, watch – for the first time – how Russian special ops engage their enemies in Syria.
- Senate Quietly Passes The "Countering Disinformation And Propaganda Act"
While we wait to see if and when the Senate will pass (and president will sign) Bill “H.R. 6393, Intelligence Authorization Act for Fiscal Year 2017″, which was passed by the House at the end of November with an overwhelming majority and which seeks to crack down on websites suspected of conducting Russian propaganda and calling for the US government to “counter active measures by Russia to exert covert influence … carried out in coordination with, or at the behest of, political leaders or the security services of the Russian Federation and the role of the Russian Federation has been hidden or not acknowledged publicly,” another, perhaps even more dangerous and limiting to civil rights and freedom of speech bill passed on December 8.
Recall that as we reported in early June, “a bill to implement the U.S.’ very own de facto Ministry of Truth has been quietly introduced in Congress. As with any legislation attempting to dodge the public spotlight the Countering Foreign Propaganda and Disinformation Act of 2016 marks a further curtailment of press freedom and another avenue to stultify avenues of accurate information. Introduced by Congressmen Adam Kinzinger and Ted Lieu, H.R. 5181 seeks a “whole-government approach without the bureaucratic restrictions” to counter “foreign disinformation and manipulation,” which they believe threaten the world’s “security and stability.”
Also called the Countering Information Warfare Act of 2016 (S. 2692), when introduced in March by Sen. Rob Portman, the legislation represents a dramatic return to Cold War-era government propaganda battles. “These countries spend vast sums of money on advanced broadcast and digital media capabilities, targeted campaigns, funding of foreign political movements, and other efforts to influence key audiences and populations,” Portman explained, adding that while the U.S. spends a relatively small amount on its Voice of America, the Kremlin provides enormous funding for its news organization, RT.“Surprisingly,”
Portman continued, “there is currently no single U.S. governmental agency or department charged with the national level development, integration and synchronization of whole-of-government strategies to counter foreign propaganda and disinformation.”
Long before the “fake news” meme became a daily topic of extensive conversation on wuch mainstream fake news portals as CNN and WaPo, H.R. 5181 would rask the Secretary of State with coordinating the Secretary of Defense, the Director of National Intelligence, and the Broadcasting Board of Governors to “establish a Center for Information Analysis and Response,” which will pinpoint sources of disinformation, analyze data, and — in true dystopic manner — ‘develop and disseminate’ “fact-based narratives” to counter effrontery propaganda.
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Fast forward to this past Thursday, December 8, when the “Countering Disinformation and Propaganda Act” passed in the Senate, quietly inserted inside the 2017 National Defense Authorization Act (NDAA) Conference Report.
Here is the full statement issued by the generously funded Senator Rob Portman (R- Ohio) on the passage of a bill that further chips away at press liberties in the US, and which sets the stage for future which hunts and website shutdowns, purely as a result of an accusation that any one media outlet or site is considered as a source of “disinformation and propaganda” and is shut down by the government.
Senate Passes Major Portman-Murphy Counter-Propaganda Bill as Part of NDAA
Portman/Murphy Bill Promotes Coordinated Strategy to Defend America, Allies Against Propaganda and Disinformation from Russia, China & Others
U.S. Senators Rob Portman (R-OH) and Chris Murphy (D-CT) today announced that their Countering Disinformation and Propaganda Act – legislation designed to help American allies counter foreign government propaganda from Russia, China, and other nations – has passed the Senate as part of the FY 2017 National Defense Authorization Act (NDAA) Conference Report. The bipartisan bill, which was introduced by Senators Portman and Murphy in March, will improve the ability of the United States to counter foreign propaganda and disinformation by establishing an interagency center housed at the State Department to coordinate and synchronize counter-propaganda efforts throughout the U.S. government. To support these efforts, the bill also creates a grant program for NGOs, think tanks, civil society and other experts outside government who are engaged in counter-propaganda related work. This will better leverage existing expertise and empower local communities to defend themselves from foreign manipulation.
“The passage of this bill in the Senate today takes us one critical step closer to effectively confronting the extensive, and destabilizing, foreign propaganda and disinformation operations being waged against us. While the propaganda and disinformation threat has grown, the U.S. government has been asleep at the wheel. Today we are finally signaling that enough is enough; the United States will no longer sit on the sidelines. We are going to confront this threat head-on,” said Senator Portman. “With the help of this bipartisan bill, the disinformation and propaganda used against our allies and our interests will fail.”
“Congress has taken a big step in fighting back against fake news and propaganda from countries like Russia. When the president signs this bill into law, the United States will finally have a dedicated set of tools and resources to confront our adversaries’ widespread efforts to spread false narratives that undermine democratic institutions and compromise America’s foreign policy goals,” said Murphy. “I’m proud of what Senator Portman and I accomplished here because it’s long past time for the U.S. to get off the sidelines and confront these growing threats.”
NOTE: The bipartisan Countering Disinformation and Propaganda Act is organized around two main priorities to help achieve the goal of combatting the constantly evolving threat of foreign disinformation. They are as follows:
- The first priority is developing a whole-of-government strategy for countering foreign propaganda and disinformation. The bill would increase the authority, resources, and mandate of the Global Engagement Center to include state actors like Russia and China in addition to violent extremists. The Center will be led by the State Department, but with the active senior level participation of the Department of Defense, USAID, the Broadcasting Board of Governors, the Intelligence Community, and other relevant agencies. The Center will develop, integrate, and synchronize whole-of-government initiatives to expose and counter foreign disinformation operations and proactively advance fact-based narratives that support U.S. allies and interests.
- Second, the legislation seeks to leverage expertise from outside government to create more adaptive and responsive U.S. strategy options. The legislation establishes a fund to help train local journalists and provide grants and contracts to NGOs, civil society organizations, think tanks, private sector companies, media organizations, and other experts outside the U.S. government with experience in identifying and analyzing the latest trends in foreign government disinformation techniques. This fund will complement and support the Center’s role by integrating capabilities and expertise available outside the U.S. government into the strategy-making process. It will also empower a decentralized network of private sector experts and integrate their expertise into the strategy-making process.
* * *
In other words, the Act will i) greenlight the government to crack down with impunity against any media property it deems “propaganda”, and ii) provide substantial amounts of money fund an army of “local journalist” counterpropaganda, to make sure the government’s own fake news drowns that of the still free “fringes.”
So while packaged politely in a veneer of “countering disinformation and propaganda”, the bill, once signed by Obama, will effectively give the government a full mandate to punish, shut down or otherwise prosecute, any website it deems offensive and a source of “foreign government propaganda from Russia, China or other nations.” And since there is no formal way of proving whether or not there is indeed a foreign propaganda sponsor, all that will be sufficient to eliminate any “dissenting” website, will be the government’s word against that of the website. One can be confident that the US government will almost certainly prevail in every single time.
- The Eurodollar Market: It's Not Working!
By Chris at www.CapitalistExploits.at
Today we discuss the largest wholesale funding market in the world, the eurodollar market, and how its “normal” form of functioning has dramatically changed, causing all manner of problems in the global economy.
In last week’s post we discussed shadow banking at its finest: the eurodollar market. It was the precursor to this article and so if you’ve not read it then it’ll be useful to do so here before reading this article.
In that article I mentioned that the eurodollar financing market has never returned to the levels prior to the GFC. Let’s first retrace the steps to understand what exactly has happened since the central banks all “saved us” from annihilation. In doing so I hope to lay the foundation for my belief as to why it is that some 8 years on the world is still mired in lacklustre growth, rising inequality, and this prolonged recession, which never seems to want to go away.
Everyone senses that things have changed, they’re different, out of sync… wrong. But why?
Let’s dig in…
Killing Us Softly – Medicinal Cyanide
Central bank responses to the GFC were that the federal funds target was at the zero lower bound as the Fed attempted to provide stimulus through unsterilized purchases of Treasury and mortgage-backed securities (MBS), or what is popularly referred to as quantitative easing (QE).
Between 2009 and 2014, the Fed threw three rounds of QE at the global economic wall praying that at least one would stick. And so, like trying to carve a pineapple with a plastic spoon, failing, and then attacking the pineapple with yet more plastic spoons, the Fed took something NOT working to be evidence that quantity and size is the problem rather than strategy. Genius.
The third round of QE was completed in October 2014 at which point the Fed’s balance sheet was $4.5 trillion — five times its pre-crisis size. Quite some price to pay, and for what?
The Fed weren’t alone in this. Our sake drinking friends were at it too, giving new meaning to the phrase “big in Japan”, as were the Europeans and Brits. All in all, quite simply unprecedented and extremely unorthodox coordinated central bank actions.
All this intervention by central banks was designed to get the credit markets cranking again. Lower interest rates being the primary mechanism and central bank balance sheets bearing the burden.
Let me just say that for anyone who’s spent some time understanding how an economy functions, you’ll realise that shifting rates to negative is bat shit crazy. If you think about how the capitalist system operates, you realise that we need a complete overhaul of education systems in the developed world, if all it does is puke up the kind of intellect currently running central banks.
Case in point:
Ask any money manager what the risk free discount rate should be and they don’t have an answer for you. Risk managers, you know those guys managing your pension funds, the insurance portfolios, mutual funds, and quite frankly every asset manager on earth with just a fraction of a clue, has to use some rate in whatever model he’s constructed. Since it’s now so difficult to know what the “real” rate is, asset prices are wildly skewed as a consequence.
Central banks, in trying to stimulate the global economy, created an environment where increasingly the risk free rate approaches 0%. I’ve seen some models whereby the risk free rate used accelerates towards infinity, using linear progression (I’ve spoken about linear thinking in a dynamic world before). Explain to me how that works because I can’t fathom it. In such a world or with such a theory risk disappears all together. Nirvana!
That’s a real consequence of central banks actions. Severe distortions in asset prices globally.
After QE
Although QE at the Fed has since ended, they announced the intention to maintain the balance sheet at its current level for the time being. In September 2014, the Fed announced a framework for normalizing monetary policy after QE, explaining that they would raise interest rates despite a large balance sheet.
The strategy was to mainly raise the rate of interest paid to banks on reserves and by engaging in reverse repurchase agreements (reverse repos). Quite a few money managers figured they were calling the markets’ bluff.
So we’re all familiar with the monetary policies but let me bring this back to the eurodollar market.
Signs That Things Aren’t Working
Some of the most notable signs that the interbank lending market, of which eurodollars plays the most significant part, isn’t functioning correctly is seen in the repo market.
Now think of all the government securities issued. Well, these securities can act as collateral much like your house can act as collateral for a mortgage. A repo is short for a repurchase agreement and they’re used for short term borrowing.
So a dealer or any holder of a government security such as T-bills sells them to a lender and agrees to repurchase them at an agreed price at a future date. In this respect it’s a simple forward rate agreement. They are therefore really attractive for 2 main reasons:
- They’re very short dated (overnight or up to 30 days or more), and
- They’re government backed.
As a result they’re considered virtually risk free and typically super liquid.
The problem, and this was highlighted to me by Jeff Snider at Alhambra Investment Partners (BTW, Jeff’s work is excellent) is that we’ve had repeated repo fails since 2014.
Essentially what we have is the market refusing securities as collateral. Hmmm…
Now, as a quick aside. Other collateral enters the system as reverse repos.
So for example, if you want to enter the market but don’t have treasuries to provide as collateral, you can go into the secondary market and purchase those Treasuries using, say, junk bonds. You post your junk bonds as collateral, receive the Treasuries, and then use those Treasuries as collateral in the repo market. This naturally involves a higher spread cost but that’s essentially how it works.
Now when any of the underlying collateral fails as happened in 2007 and 2008 when mortgage bonds were rejected as collateral the knock on effect is felt in the repo market and liquidity dries up in a hurry.
Generally speaking in any crisis it’s reasonable to expect particular assets to be rejected as collateral as those assets are being repriced by the market. After all, if you’re unsure of what the price of any asset used as collateral is going to be tomorrow morning, then you’re a few sandwiches short of a picnic if you enter into any agreement to repurchase the asset again without figuring out how much risk you’re taking on the ultimate market price of the asset.
Now, to be clear there are two reasons that the repo market can fail:
- Credit risk
- Liquidity risk
Credit risk would be a sign that the collateral is not of high enough quality. And liquidity risk would be a sign of a dollar funding shortage.
I believe that a combination of the two are at play. Government securities are still considered high quality collateral but other markets clearly are not. Junk bonds, mortgage backed securities, corporate paper, and so forth are in question.
So we’ve had repeated repo fails. This means that funding as it should function isn’t taking place which is contractionary despite all the easing central banks have been doing, and this repudiation of existing collateral is highly contractionary. This contraction and failure in repos coincided with the USD breaking out of it’s decade long bear market in late 2014 which I spoke about here and here.
To be clear, at the time I wasn’t aware of repo fails, though we spotted the asymmetry in this market and identified interbank lending constraints, which helped in determining the dollar shortage ahead of its subsequent rise – bully for us.
It was only much later, recently actually, that I began to pick up additional pieces of this puzzle, which we’re discussing now. I believe they provide us with a much more granular and complete picture as to what’s going on. Important if we are to determine outcomes ahead of time and make some dough. In any case, let’s move on…
Monetary Expansion But Where’s the Growth?
The majority of the world’s assets and businesses over the last couple of decades have been created and sustained only by a falling interest rate environment. Without it many wouldn’t exist and without it many others would have subsequently been created. But they haven’t and this is the real tragedy.
When central banks hold the cost of capital at zero, or at levels inconsistent with market forces, this induces mal-investment in the system. And the longer this environment persists the further this mal-investment is promoted.
I think most people understand that but what this translates into is severe deterioration in productivity growth. After all, why build a productive business when you are forced to compete with unproductive competitors who are supported by mal-investment?
So you get this stagnant economy as a result, and because the incentives are no longer market driven but policy driven, the return on capital naturally diminishes. This is quite dangerous and leads to the political upheaval I’ve been talking about and the breakdown in social contracts and much of the problems I discussed in the breakdown in Europe.
Collateral Creation
And so what we have is a global banking system that’s decided it’s no longer in its interests to provide the funding mechanism to the world. And this isn’t some cabal of cigar smoking, pointy shoed banker bastards. This is a structural decision made by tens of thousands of market participants globally. There is a fundamental reason for this and that reason is collateral shortage – a shortage actually created by central banks and their policies.
What this means is that high quality collateral is NOT being created. Think of small businesses which are the lifeblood of any healthy economy. In addition to this the existing collateral is actually being sucked out of the system, meaning that the wholesale funding market (the eurodollar market) is short of collateral, and since it’s short of collateral, it’s short of dollars. This is one more and very important leg to the reason I think the dollar goes higher, much higher.
Since collateral is a complex topic in itself, I’ll bring out the axe and attempt to chop it into pieces for you next week so make sure you’re on our mailing list so you don’t miss it.
Oh, and I have a real treat for subscribers on Monday and Tuesday as I recorded one of the many conversations I have with the smartest investors on this ball of dirt. This one with Mark Yusko of Morgan Creek Capital who, if you’re not following, you are indeed doing yourself a disservice.
– Chris
“Our analysis leads us to believe that recovery is only sound if it does come from itself. For any revival which is merely due to artificial stimulus leaves part of the work of depression undone and adds, to an undigested remnant of maladjustments, new maladjustments of its own.” — Joseph Schumpeter
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- 2007 All Over Again – Stock Valuations Enter "Crash" Territory
Submitted by John Rubino via DollarCollapse.com,
The Trump Christmas stock market rally has taken valuations beyond a point that in the past has signaled trouble, which in turn has generated a lot of cautionary press like the following:
Market indicator hits extreme levels last seen before plunges in 1929, 2000 and 2008
(CNBC) – While the S&P 500 is reaching all-time highs on optimism over Donald Trump’s economic agenda, some Wall Street strategists are increasingly worried about a widely followed valuation measure that’s reached levels that preceded most of the major market crashes of the last 100 years.“The cyclically adjusted P/E (CAPE), a valuation measure created by economist Robert Shiller now stands over 27 and has been exceeded only in the 1929 mania, the 2000 tech mania and the 2007 housing and stock bubble,” Alan Newman wrote in his Stock Market Crosscurrents letter at the end of November.
Newman said even if the market’s earnings increase by 10 percent under Trump’s policies “we’re still dealing with the same picture, overvaluation on a very grand scale.”
The Shiller “cyclically adjusted price-to-earnings ratio” (CAPE) is calculated using price divided by the index’s average historical 10-year earnings, adjusted for inflation. Yale economics professor Robert Shiller’s research found future 10-year stock market returns were negatively correlated to high CAPE ratio readings on a relative basis. He won the Nobel Prize in economics in 2013 for his work on stock market inefficiency and valuations.
Other academics agreed the current extreme CAPE ratio of 27.7 is a worrying sign for future returns versus bonds.
“Only when CAPE is very high, say, CAPE is in the upper half of the tenth decile (CAPE higher than 27.6), future 10-year stock returns, on average, are lower than those on 10-year U.S. Treasurys,” Valentin Dimitrov and Prem C. Jain wrote in paper titled “Shiller’s CAPE: Market Timing and Risk” on Nov. 17.
Even based on the more common price-earnings ratio, the market looks rich. The S&P 500’s P/E based on earnings of the last 12 months is 18.9, the highest in more than 12 years, according to FactSet.
“U.S. valuations start off as being high both on a historical basis and also on a peer group. Certainly based on the Shiller PE, the equity market seems expensive,” Jefferies chief global equity strategist Sean Darby wrote on Nov. 29.
The above chart requires a bit of interpretation, mainly because of that spike in 1999 which seems to imply a much higher ceiling for stock valuations. It probably doesn’t, because of the uniquely delusional nature of the tech stock bubble. That market was driven by newly-minted dot-coms and related companies that in many cases had minimal or no earnings, so prices weren’t related to profits. In other words, you can’t calculate a price/earnings ratio if there are no earnings.
“Eyeballs” – that is, the number of people visiting at a dot-coms’ website – had temporarily replaced traditional valuation measures in the hearts of speculators. With disastrous results.
Today’s market, in contrast, is made up of companies with actual earnings, so it might be safe to discount 1999 and use the rest of the chart for comparison. In which case current equity prices look extremely dangerous.
On the other hand, today’s world has departed from past business-as-usual in other ways that might be relevant. Debt no longer seems to matter – witness the US, after doubling the federal debt in a single presidential administration, installing a new president whose platform calls for massive increases in borrowing and spending.
And while monetary policy is past eras operated in an at least partially-constrained environment, today there are apparently no limits on how low interest rates can go or how many and what kinds of assets central banks can buy with newly-created currency.
The Japanese and Swiss national banks, for instance, are already huge buyers of equities. If the Fed decides to join that party – something that Chairwoman Janet Yellen has already publicly considered – then it’s not clear whether P/E ratios will continue to matter. The unlimited printing press is definitely an argument for “this time is different.”
So is it no longer possible to make predictions based on pre-QE history? Or are there financial and economic laws that apply no matter what crazy new tools the world’s governments decide to employ?
Almost certainly the latter. Manipulating one part of the system – by, for instance, buying equities with newly-created currency – just shifts the pressure of financial imbalances to a different, harder-to-control place.
Lately the bond market has begun to show signs of stress – because who wants to own zero-coupon long-term bonds in a world where governments need higher inflation and are willing to do pretty much anything to get it?
What happens if governments respond to bond market turmoil by creating even more currency and buying up all the long-term bonds, as Japan is currently doing in its own market? The pressure will shift to the foreign exchange markets, because who will want to own fiat currencies that are being created at rates far exceeding the growth of the real economy?
Fiat currencies are the one thing governments can’t buy up with newly-created money. All are at the moment falling in relation to artificially-inflated stock and real estate prices, though we don’t notice because currencies are valued against each other. But let a soaring money supply translate into rising general prices (something the bond market is now signaling) and it’s game over. Governments will face rising instability without tools capable of managing it.
At which point we’ll return to the above chart and wonder why we didn’t trust history?
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