- Here's How Much Europe Depends On The UK
Euroskeptiscism is on the rise in Europe. Countries like Poland and Hungary have actively sought to limit the EU’s influence and ignore its rules—most recently with regard to refugee policies.
Even the most Euroskeptic governments, however, campaigned against Brexit. While European nations may want to limit the EU’s role and influence at home, both economic and security interests led them to support the UK’s membership in the EU (read our free special report on Brexit implications).
This opposition to Brexit is an example of why interests—much more than ideology—matter in geopolitics.
European powers depend on exports to the UK
European nations are heavily invested in their relationship with the UK. The UK is the fourth-largest importer in the world, and the EU needs British import demand.
EU member states’ trade ties with the UK vary, but several European economies send a significant amount of their exports to Britain.
Nearly 14% of Irish exports went to the UK in 2015. 9% of the Netherlands’ exports and 7.4% of Germany’s exports also went to this nation in 2015.
With countries like Germany facing reduced global demand for their goods, European governments cannot afford to lose access to British customers.
The UK was a major contributor to the EU’s budget
12.6% of the EU’s revenues came from the UK in 2015. When less developed countries joined the EU, the older members took on a greater financial burden. They hoped that expansion would boost investment opportunities and enhance the bloc’s security in the long term.
The UK was one of only 10 net contributors to the EU budget – along with Germany, France, the Netherlands, Italy, Sweden, Austria, Denmark, Finland, and Ireland. For these wealthy European economies, a British exit means an increased financial burden.
Eastern Europe needs access to UK labor markets
British job opportunities and remittance flows are highly significant for Eastern Europe. Eastern Europe has enjoyed low unemployment rates—in large part because millions of Eastern Europeans work in other EU countries… most notably, the UK.
Over 740,000 Polish citizens and over 160,000 Lithuanian citizens resided in the UK in 2014 according to Eurostat. There are also reportedly over 500,000 Hungarians abroad, with an estimated 300,000 in the UK.
Britain and the EU are likely to reach a trade deal. Nevertheless, if this deal is bilateral, there are no guarantees that workers from Central Europe could continue working in the UK.
Brexit is more than just an economic threat to Europe
Europe’s unease is about more than economics. Some countries see Brexit as a threat to the region’s security interests. The Kremlin has been working to split the Western alliance, while the EU has been fragmenting under the weight of internal challenges and diverging interests.
Eastern European nations fear that Western Europe may abandon them. Countries like Poland know that a more divided Europe is even less likely to act rapidly and cohesively to aid allies in the east.
The UK is a highly strategic ally for European nations. Britain boasts one of Europe’s most powerful militaries, despite some downsizing and a reduction in overseas operations over the years.
Plus, The Royal Navy remains the second-largest navy in NATO, after the US Navy.
All of this confirms that Europe can’t afford a break-up with Britain. The EU and Britain, therefore, are likely to reach a trade deal and maintain close economic and military ties despite the Brexit vote.
- Europe’s Economic Crisis Has Spread from the Periphery to the Core
We’ve noted for more than 5 years that the European crisis would spread in the following order … more or less:
Greece → Ireland → Portugal → Spain → Italy → UK
We also warned that the EU’s approach to economic problems in the periphery would lead the cancer to spread to the core. For example, we’ve repeatedly warned that:
- Bailing out the big European banks would just transfer the risk to the people
- Propping up stocks and asset prices won’t get Europe out of the crisis
- Covering up fraud by the European banks would sink the economy
Now, the IMF is forecasting that Italy could be in recession for two decades … and that it’s weakness could spread to the rest of the system.
Britain is – of course -in trouble. But it’s not just Brexit …
Europe has been stuck in a downturn worse than the Great Depression for years. The former Bank of England head Mervyn King said recently that the “depression” in Europe “has happened almost as a deliberate act of policy”. Specifically, King said that the formation of the European Union has doomed Europe to economic malaise.
He points out that Greece is experiencing “a depression deeper than the United States experienced in the 1930s”.
(Indeed, some say that the UK was smart to get out while it could.)
Even Germany’s largest bank, and the bank with the highest exposure to derivatives anywhere in the world – Deutsche Bank – is in big trouble.
Here’s its stock price:
And here’s its market capitalization:
In May, Moody’s downgraded Deutsche to a mere 2 notches above junk.And credit default swaps – bets that a company is in risk of failing – against Deutsche have absolutely skyrocketed:
Deutsche Bank’s chief economist just said:
Europe is extremely sick and must start dealing with its problems extremely quickly, or else there may be an accident.
He’s calling for a $166 billion dollar bailout of European banks.
BlackRock Inc. Vice Chairman Philipp Hildebrand said earlier this month the European Commission should allow governments to take temporary equity stakes in their banks, similar to what the U.S. did with its Troubled Asset Relief Program during the 2008 crisis.
Europe has made bad choices since the 2008 crisis … so Europe’s economic crisis has spread from the periphery to the core.
- Don't Just Blame The Cops: Who Is Responsible For America’s Killing Fields?
Submitted by John Whitehead via The Rutherford Institute,
“I could never again raise my voice against the violence of the oppressed in the ghettos without having first spoken clearly to the greatest purveyor of violence in the world today: my own government. For the sake of those boys, for the sake of this government, for the sake of the hundreds of thousands trembling under our violence, I cannot be silent.”—Martin Luther King Jr.
The latest shootings—in Texas, Minnesota, Louisiana, Illinois, New York, Missouri and every other state in the nation—are symptomatic of a psychotic outbreak by a nation that has been waging a war against its own citizens for too long.
We have long since passed the stage at which a government of wolves would give rise to a nation of sheep. As I point out in my book Battlefield America: The War on the American People, what we now have is a government of psychopaths that is actively breeding a nation of psychopathic killers.
We’re getting distracted, people.
Instead of focusing our ire on the architects of the American police state, who are responsible for turning the streets into mini-war zones, we’re getting distracted by the many voices eager to play the blame game by pointing their fingers at someone else.
Police groups are blaming President Obama and the Justice Department for failing to prosecute “cop killers.” Texas Republicans are blaming the Black Lives Matter movement for fomenting a “war on cops” mindset. Gun control advocates are blaming “gun lovers and their mouthpieces at the National Rifle Association” for America’s gun violence, reasoning that if all Americans were unarmed, police would not have to treat them as potential threats.
News outlets such as Rolling Stone and Mother Jones have concluded that racial bias is to blame for the “disproportionately high number of African-Americans among police shooting victims.” The Drug Enforcement Administration has suggested that illegal steroid use could be responsible for “police officers who exhibit rage, aggression and/or poor judgment (all symptoms of possible steroid abuse) in confrontations with citizens.”
Human Rights Watch blames police misconduct and excessive use of force on a systemic lack of accountability within law enforcement agencies and the criminal justice system. And civil rights advocates are blaming police militarization and the abundance of laws (overcriminalization) pushed by lawmakers for the nation’s over-policing, over-jailing and over-killing.
Yet in the midst of all this finger pointing, no one is stepping forward to take responsibility for the violence that is tearing the nation apart, deepening racial tensions, heightening police tensions, justifying all manner of civil liberties abuses, and pushing us ever closer to a state of lockdown.
Shame on President Obama for not taking personal responsibility for the blowback resulting from America’s endless wars abroad, the militarization of local police, and the ramifications of allowing police to use battlefield equipment such as drones, assault weapons, tanks, etc. How telling that the first domestic killing of an American citizen by a drone (in this case, a bomb-equipped police robot) should be carried out during the final term of a president whose targeted drone killings abroad have resulted in the deaths of thousands of innocent civilians.
Shame on Congress and the countless federal and state policy-making bodies for not taking responsibility for the overabundance of laws that have turned law-abiding citizens into criminals and police into the inflexible enforcers of a legal code that benefits the corporate elite at the expense of the working classes.
Shame on Corporate America, particularly the military industrial complex, for not taking responsibility for having militarized America’s police forces and subjected its citizenry to the tyranny of a heavily armed police state.
Shame on the various government agencies, from the FDA and Social Security Administration to the Department of Education, for not taking responsibility for ratcheting up tensions by using military firepower to advance their bureaucratic agendas.
Shame on Republicans and Democrats for not taking responsibility for having sidelined legitimate matters of concern such as police misconduct in favor of party politics and campaign contributions from special interest groups and unions.
Shame on the courts for not taking responsibility for allowing government agents to hide behind the shield of qualified immunity, rather than being held accountable for their actions.
Shame on law enforcement agencies for advancing the notion that the lives—and rights—of police should be valued more than citizens. Shame on them for not taking responsibility for allowing blind allegiance to the so-called “thin, blue line” to trump the constitutional rights afforded to every American equally.
Shame on communities for not taking responsibility for using SWAT teams that are armed to the teeth and ready for action to deliver mere search warrants, terrorizing and killing American citizens.
Shame on those who embrace violence as an answer to what ails America for not taking responsibility for their part in contributing to an environment that is growing increasingly tense with every new shooting. It’s a vicious cycle in which the police are becoming more hypersensitive, twitchy and quick to shoot at the slightest provocation, and the populace is growing more fearful, outraged and unconvinced that if they “just obey,” all will be fine.
Shame on the religious community for not taking responsibility for its deafening silence in the face of what can only be termed evil, despite its historic lineage of dissenters such as Jesus, Gandhi, Martin Luther King Jr. who dared to speak truth to power.
Shame on white Americans, black Americans, brown Americans and every other skin tone in between for not taking responsibility for their part in allowing racism, prejudice and bigotry to dictate justice in America.
And shame on so-called “patriotic” Americans who equate good citizenship with blind obedience to government authority and adulation of the military for not taking responsibility for holding their government officials accountable to the nation’s founding principles. Remember, “we the people” were entrusted with the power to make and unmake the government whenever it ran afoul of its primary purpose, which is to protect our lives, freedoms and property.
Clearly, there’s more than enough blame to go around, but the real question is what can “we the people” do about it? What can average Americans do to stay alive and counter the violence being inflicted on our communities? What can you do to push back against the power of the police state?
For starters, let’s all agree that violence can never be the answer. Violence will only give rise to more violence.
Stop buying into the “us vs. them” rhetoric being pushed by politicians, police unions and those who use the race card as a justification for bloodshed. No matter what color your skin is, what politics you subscribe to, how much money you’ve got, whom you love, where you live, whom you worship, what school you attend, where you work, or any other superficial label that is used to divide us: we all bleed red.
Put your prejudices behind you and stop dealing in stereotypes. Not all police are bloodthirsty. Not all young black men are thugs. Not all people who challenge government authority want anarchy.
In a police state, you’re either the one with your hand on the trigger or you’re staring down the barrel of a loaded down. In other words, we’re all in this together. The oppression and injustice—be it in the form of shootings, surveillance, fines, asset forfeiture, prison terms, roadside searches, etc.—will come to all of us eventually.
Stop allowing yourself the luxury of distraction and the sin of neutrality. These things happen—the madness and the mayhem—because good people stood by and did nothing.
The only real power we have to push back against the police state is as a unified body.
So what can you do on a practical level?
For starters, find common ground on the issue of gun control, especially as it pertains to government agents. Demilitarize the police. It’s worked in other countries.
Demand that police be held financially responsible for official misconduct.
Put your taxpayer dollars to work for you instead of against you for a change. Tell your elected representatives to stop investing in militarization, wars and weaponry that will only be used against you eventually. Instead, apply the same funds being wasted on endless wars abroad on badly needed infrastructure here at home. By putting more Americans to work rebuilding our communities and our economy, we’ll also strike at the heart of the poverty that drives crime.
Get informed about the workings of government. Get outraged about the corruption that has rotted our republic from the core. Get vocal about the need for transparency, accountability and reform. There are so many issues in need of attention. Pick just one to start with and raise hell about it. For instance, why has the government been spending three times more on jails and prisons than schools for the past 30 years?
Finally, take it upon yourself to interfere. Pay attention to what’s going on around you. Use those cell phones that are never far from your side and record police interactions in order to hold them accountable to playing by our rules, the rules of the Constitution. Most important of all, take a stand for freedom and humanity. “Neutrality,” as Holocaust survivor Elie Wiesel reminded us, “helps the oppressor, never the victim. Silence encourages the tormentor, never the tormented. Sometimes we must interfere. When human lives are endangered, when human dignity is in jeopardy, national borders and sensitivities become irrelevant. Wherever men and women are persecuted because of their race, religion, or political views, that place must – at that moment – become the center of the universe.”
- The Chinese Will Need Another Bailout
Here we go again. China is primed for more bailouts as their corporations and State Owned Enterprises (SOE) continue burning through billions of yuan. At the turn of the month we learned Sinopec manipulated revenues. As Reuters reported at the time, some 12 subsidiaries of Sinopec had fake invoices among other faults. Chinese companies are loading up on debt and they are investing it terribly.
Reuters also said 10 state-owned firms had "huge losses" driven primarily from bad investment decisions. Sinopec subsidiaries blew cash on 14 unused chemical plants as well acquiring two dozen fuel stations illegally.
"China's national audit department reviewed the financials of the 10 largest state-owned companies including Aluminium Corporation of China (CHALCO), Sinopec and China National Offshore Oil Corporation (CNOOC), exposing huge losses in these firms as a result of low efficiency and bad investment decisions. The auditing office also pointed to wasted investments Sinopec's subsidiaries made, such as 14 unused chemical plants, and raised red flags on two dozen "illegally acquired" fuel stations."
Oh yeah, these guys are real winners when it comes to running business and making investments. As Citi pointed out, China's SOE's have Pre-tax Profit Margins and Liability-to-Asset ratios that do not appear to reflect wise decision making:
China's corporations are horrible with investment. We are not shocked by this. We expect many more Chinese bailouts to come as the country's money-gods lose total control of the monster they have unleashed through reckless monetary policy.
The investment decisions have become so bad that a source told Bloomberg that up to 10 SOE's may require a bail out:
China is considering providing about 10 of its state-owned enterprises with an aid package, people familiar with the matter said. Sinosteel Corp. is among those that may receive help, one of the people said
In an effort to throw the kitchen sink plus more at the equity market, China will now be deferring a portion of a $300 billion pension fund into the Chinese market. A wise choice? Perhaps not, especially since the Chinese have painted themselves into another bailout corner.
With malinvestment as we saw re: Sinopec, to China's need to backstop at least 10 failing state-owned enterprises, and now the clear desperation of getting pension money exposed to the equity market, presumably ahead of more central bank stimulus, it's becoming evident that the Chinese are running out of options. Once the entire nation is invested in stocks and the central bank is buying hand over fist, the Chinese market manipulation will have jumped the shark, because their explosive Debt-to-GDP didn't seem to mark a turning point in the Chinese economic story as of yet:
But don't worry, the National Council for Social Security Fund in China that will manage the pension fund investments has an appreciation from the Chinese people akin to what some believe American's have for Warren Buffett, reportedly:
The NCSSF has "such a good reputation in being a value investor that if they take the lead, the signaling effect is actually quite strong," said Hong, who had predicted the start and peak of China’s equity boom last year. "It’s almost like Warren Buffett saying he is buying a stock."
Which is unique because frequent Zero Hedge readers may recall a different Chinese version of Warren Buffett:
On Thursday, we learn that yet another high profile businessman has apparently vanished and this time, it’s none other than “China’s Warren Buffett,” Guo Guangchang (worth some $7 billion at last count) whose conglomerate Fosun International is morphing into an insurance-focused investment group. Fosun spent more than $6 billion buying stakes in 18 overseas companies between February and July.
China just burning cash and it is amazing they have lasted this long. How much longer will the cash pile burn? Maybe MOAR cash infusions is the answer…
- Harvard Study Finds No Racial Bias In Police Shootings
A very recently published Harvard study on racial bias in police use of force finds that, as the mainstream narrative proffers, black men and women are treated differently in the hands of law enforcement. However, in what the (African-American) author of the study calls "the most surprising result of my career," when it comes to the most lethal form of force – police shootings – the study finds no racial bias, contradicting the mental image of police shootings that many Americans hold.
As The NY Times reports, the study did not say whether the most egregious examples — the kind of killings at the heart of the nation’s debate on police shootings — are free of racial bias. Instead, it examined a much larger pool of shootings, including nonfatal ones. It focused on what happens when police encounters occur, not how often they happen. (There’s a disproportionate number of tense interactions among blacks and the police when shootings could occur, and thus a disproportionate outcome for blacks.) Racial differences in how often police-civilian interactions occur have been shown reflect greater structural problems in society.
Black men and women are treated differently in the hands of law enforcement. They are more likely to be touched, handcuffed, pushed to the ground or pepper-sprayed by a police officer, even after accounting for how, where and when they encounter the police…
But Roland G. Fryer Jr., the African-American author of the study and a professor of economics at Harvard – which examined more than 1,000 shootings in 10 major police departments, in Texas, Florida and California, was "surprised" to find that when it comes to the most lethal form of force — police shootings — the study finds no racial bias.
Mr. Fryer said his anger after the deaths of Michael Brown and Freddie Gray and others drove him to study the issue. “You know, protesting is not my thing,” he said. “But data is my thing. So I decided that I was going to collect a bunch of data and try to understand what really is going on when it comes to racial differences in police use of force.”
In officer-involved shootings in these 10 cities, officers were more likely to fire their weapons without having first been attacked when the suspects were white. Black and white civilians involved in police shootings were equally likely to have been carrying a weapon. Both of these results undercut the idea that the police wield lethal force with racial bias.
…
However, for Mr. Fryer, who has spent much of his career studying ways society can close the racial achievement gap, the failure to punish excessive everyday force is an important contributor to young black disillusionment.
“Who the hell wants to have a police officer put their hand on them or yell and scream at them? It’s an awful experience,” he said. “I’ve had it multiple, multiple times. Every black man I know has had this experience. Every one of them. It is hard to believe that the world is your oyster if the police can rough you up without punishment. And when I talked to minority youth, almost every single one of them mentions lower level uses of force as the reason why they believe the world is corrupt.”
- Kyle Bass Was Right: Here Is SocGen's Primer How To Trade The Biggest Yuan "Depreciation Wave" Yet
For a few months in early 2016 it was cool to make fun of Kyle Bass’ career bet on Yuan devaluation; now that the Yuan is back to 6 year lows and sliding as China once again quietly loses control of its capital outflows, it is not so cool any more.
And with every passing day, it is only going to get worse because despite all the rhetoric, China’s economy is getting worse by the day. As SocGen puts it, “there have been signs of reviving capital outflow pressure since early 2Q. If the deprecation continues apace, capital outflow pressure will build up further and potentially quite quickly. The fact that the PBoC keeps stepping up capital controls despite the innocuous official flow data seems to suggest that it is also expecting an uphill battle.“
And speaking of SocGen’s outlook for China’s currency , this is what the French bank – which just cut its Yuan forecast from 6.80 to 7.10 – thinks will happen next.
A New Normal for the RMB
We revise our peak forecast for USD-CNY to 7.10 from 6.80. Similar to immediately following the August devaluation, consensus is too complacent on the ability and willingness of policymakers to arrest the nearly three-year-old depreciation trend.
The new normal in recent months is gradual RMB depreciation that doesn’t create a negative feedback loop to other currencies or broader market sentiment. This could embolden policymakers to keep pushing the limits of depreciation, especially if speculative positioning stays subdued. Implied volatility, risk reversal, forward points, and the forward curve have all been unresponsive to the recent RMB weakness. This is partly due to the reluctance of speculative investors to add exposure after being burned by the RMB depreciation trade in January, but also because intervention remains ongoing despite not showing up in headline reserves or the forward book.
The best solution remains for policymakers to let the RMB find its market clearing price. This is not an exact science and we can only guesstimate what the level would be – 6.80 was our previous assumption but 7.10 now seems more realistic. The recent depreciation at a time when the dollar has not been strengthening suggests policymakers are increasingly giving in to capital flow pressures and are willing to the test the limits of depreciation. Further depreciation could reinforce capital outflows in the short term but should eventually help capital flows reach equilibrium.
7.10 peak – our base case, 80% probability
The next wave of RMB depreciation will see USD-CNY trade up to 7.10 by mid-2017. Since USD-CNY bottomed in early 2014, there have been five waves of depreciation and each has followed a predictable pattern: three to five months of USD-CNY increasing (+3.5% on average), followed by modest gains (+1%) spanning an equivalent time span, before another round of depreciation ensues. The predictability is suboptimal from a policy perspective, but it appears to be the PBoC’s standard playbook. While there could be some consolidation or modest strength after the current depreciation phase ends (3.6% since April), the ensuing wave and medium-term path should see USD-CNY reach 7.10 over the next year.
Cumulative depreciation of 6% over the next year would be similar to what has been experienced since October. This would not be an atypical base case for a country in a structural slowdown, with perceptible credit and banking sector risks, an imbalance in the supply-demand of capital, a tenuous reserve adequacy position, and local residents harbouring a strong desire for FX diversification.
We continue to believe that consensus is underestimating the chances of CNY depreciation, both from the ability and willingness of policymakers to prevent further depreciation. Consensus is at 6.80 in one year, which was our prior out-of-consensus call immediately following the August devaluation (back in late August consensus was at 6.50).
A gradual and controlled depreciation with periods of stability and bouts of accelerated weakness is still the most likely scenario (80% probability). A move to 7.10 may continue to be absorbed by investors without disturbances to broader market sentiment occurring, and as such we see no need to revise our EM forecasts, which currently entail modest spot depreciation that broadly matches the forwards.
Importantly, the USD-CNH trading pattern since 2014, of only retracing a portion of its gains and never revisiting the lows after an up move, should remain in place. Coupled with little fundamental justification for a stronger CNH over a 12-month horizon and fairly neutral speculative positioning, it is unlikely that USD-CNH will trade below the 6.50-6.55 area.
8.0 – the new risk scenario, 20% probability
Back in January (CNY7.50 World) we identified USD-CNY trading up to 7.50 as the risk scenario for the currency. Given ongoing capital outflows, the ability of the market to absorb recent depreciation without negative consequences, the policy decision to weaken the renminbi when the USD has been stable, and our new forecast of 7.10, the risk scenario for CNY is now much higher.
The new risk scenario for CNY is 8.0 (20% increase in USD-CNY). We assign 20% probability to this scenario. The caveat is that the pain threshold for the market appears to be much higher than before and the implications for the global financial markets will primarily depend on the speed of depreciation. We believe that it would take significantly more pressure on capital flows than what we have seen over the past few years, or an economic hard landing, for our risk scenario to unfold. Note that we have a 30% probability of a hard landing of the Chinese economy. We think that an economic hard landing might not necessarily trigger a sharp devaluation, as the authorities would most likely respond with strict capital controls amid concerns over capital flight.
Within the risk scenario, the path to 8.0 could be abrupt (not likely), slow (more likely), or fast (most likely).
- Scenario 1: one-off devaluation (<10% probability): A one-off move (i.e. step devaluation) where the PBoC then chooses to defend the new level. There would be enormous political backlash with the appearance of any active pursuit of devaluation. This would also be too risky for Beijing’s taste given that no one can say for sure how much depreciation is enough to equilibrate supply and demand. However, we assign it a nonzero probability because the authorities might ultimately decide it is the best way to realign expectations and halt domestic capital outflows.
- Scenario 2 (free float over the next year – >70% probability): The PBoC fast-tracks currency reforms through a big-bang approach to currency flexibility because either: a) capital outflows remain large and the depletion of FX reserves too great; or b) it deems the domestic and global financial markets able to absorb the shock.
- Scenario 3 (slow and steady move – 20% probability): The current strategy of steady depreciation picks up pace and intervention is used to limit overly destabilising volatility. The risk to a steady creep higher in USD-CNY is a build-up in speculative pressures and resident outflows that creates a vicious cycle of depreciation.
Finally, here is SocGen with its best ways to trade the coming Yuan devaluation:
Long USD-CNH: In our view, over a one-year horizon, being long USD-CNH has attractive risk-return characteristics on a 6% spot move, 2.5% negative carry, and limited potential for CNH to strengthen on a sustained basis. However, the entry point is critical to achieving a favourable PnL outcome and it might be prudent to wait until CNH consolidates or strengthens modestly to enter long USD-CNH positions.
Vanilla calls or call spreads are too expensive: Both these structures are too expensive when considering the probability-weighted terminal value of CNH a year from now. For example, a one-year 25d USD-CNH call has a breakeven at 7.37 while a 25d/10d call spread needs to see a move to the 7.50 area for risk-return to be attractive.
Buy 1-year call spread (6.85/7.20 strikes) and sell 1y-year 6.55 put: Under the premise that USD-CNH only retraces a modest portion of the recent gains (similar to past experience) coupled with no strong arguments for sustained appreciation on fundamental grounds, selling downside optionality can cheapen the cost of the call spread quite significantly. For example, the indicative cost of a 6.85/7.20 call spread is 1.43%, compared with a cost of 0.42% in a structure that buys the same call spread and also sells a 6.55 put. The 70% cost reduction entails unlimited losses below 6.55 but the position can be delta-hedged.
But 1-year 6.85 USD-CNH call with a knock-out at 8.0: Owning a 1-year 6.85 call option is quite expensive (indicative cost of 3% of notional) and has a poor breakeven (7.05). Whereas owning a 1-year 6.85 call with a knock out at 8.0 (our risk scenario) entails a 60% cost reduction over the vanilla call. The risk is limited to the premium paid. Positive PnL at expiry accrues above 6.90, but if the barrier level (8.0) is hit at any point over the life of the trade the structure is knocked out and the premium is lost. The structure has risk-reward of 10-1.
Short RMB against an abridged CFETS basket: Whether the CNY stabilises against the USD, depreciates modestly in an orderly and controlled manner (our base case), or experiences stronger depreciation (our risk scenario), the trade-weighted basket will be at best stable and could continue to fall. To mitigate fluctuations in the USD-CNY exchange rate, investors can short the trade-weighted exchange rate. An abridged CFETS index that includes the USD (36% weight), EUR (325), JPY (13%) and AUD (19%) is able to track the larger thirteen currency CFETS index very closely (link). The abridged basket is highly liquid and has similar negative carry as being long USD-CNH (22bp/month).
And with that, good luck in catching up to Kyle Bass.
- One Year After Surpassing Walmart, Amazon Is Now Bigger Than Berkshire
Jeff Bezos has marked another milestone. Nearly one year to the day following Amazon’s surpassing of Walmart’s market capitalization on the heels of a great report on AWS (Amazon Web Services) growth numbers, Amazon has surpassed another American business icon’s market capitalization, that of Warren Buffett’s Berkshire Hathaway…
Notably tomorrow is Amazon Prime Day 2016.
Leaving the big question – when does Amazon rise to Apple’s market cap level or will Apple fall to Amazon’s market cap level? Place your bets…
Charts: Bloomberg
- Why Gundlach Thinks It's Going To Get Worse, And Why He Is "Pretty Sure That Trump Will Win"
Yesterday, when referring to the latest interview Jeff Gundlach gave Barron’s, we presented the bearish DoubleLine “bond king’s” portfolio which he broke down as follows: “high-quality bonds, gold, and some cash.” He promptly added the following rhetorical response to inbound inquiries: “People say, “What kind of portfolio is that?” I say it’s one that is outperforming everybody else’s. I mean, bonds are up more than 5%, gold is up substantially this year [28%], and gold miners have had over a 100% gain. This is a year when it hasn’t been that tough to earn 10% with a portfolio. Most people think this is a dead-money portfolio. They’ve got it wrong. The dead-money portfolio is the S&P 500.”
Today, the market is doing its best to prove Gundlach wrong, with the S&P breaking out to new all time highs while gold takes a modest leg lower.
But while the market remains entirely reliant on the actions of central banks, and as we noted earlier, the latest push higher appears to have come from Bernanke whispering in Abe and Kuroda’s ear about the fringe benefits of helicopter money, Gundlach does not see the gains in the market trickling down into the broader economy. Just the opposite, because in another part of the same Barron’s interview, when asked if things are going to get worse – both in the economy and society – Gundlach responds as follows:
What is really happening here is that there’s massive technological change, and big changes almost always lead to political instability. People who benefit from the old construct are loath to see it change, because they don’t want to lose their power and economic advantage. And so they dig their heels in even harder. That’s what we’re seeing in Britain right now. People who remember the good old days when they had factory jobs and made a good living—that’s been taken away, and they want to do something about it… Robots are taking an awful lot of jobs. Driverless cars are coming; just think about how many jobs that is going to take away. Think of all the taxi drivers; think of all the Uber drivers who have found a source of income. How about the truck drivers? How about the livery people? A lot of people are out there driving around and getting paid for it. You get a driverless car, and all of a sudden they’re unemployed. Not all of them, of course, and not all at once. This is all part of this process.
It’s not just technology, though. Gundlach is just as worried about slumping demographics, not only :
One of the big problems in parts of Europe is a collapsing labor force. In Italy, the fertility rates are so low, and the baby-boom piece so big, that their labor force will plunge, absent immigration. Demographics are a problem that takes a generation to go away. And then you’ve got the robots, and they’re never going away. And you’ve got all this debt—the world’s debt-to-gross-domestic-product ratio is 240%—so you’re already putting a big headwind onto economic growth. Pair that with the demographics, and you get slow global growth.
When asked if he expects more political risk in the market, Gundlach responds as follows: “This is a train that’s moving down the tracks, and I don’t see it stopping until substantial change occurs. Minor fixes—like raising the top tax bracket to 39% from 36%—are not going to create an enduring solution. We are going to see it in the U.S., in our presidential election.”
Which finally brings Gundlach to the topic of Trump, and why he thinks The Donald will be America’s next president.
One of the reasons I believe Trump might win is that Brexit won. The parallels are far too great to be coincidental. They are identical in time. They are identical in mood, in the attitude of “I’m not doing what you say anymore.” People don’t want to admit that they support Trump. They hide it. A lot of people in Britain didn’t want to admit that they were voting to leave. My suspicion is that if Trump is even within the margin of error come November, he’ll win by a few percentage points.
* * *
The establishment media is putting out a lot of scare pieces about how Trump is going to destroy the world economy; that [his presidency] could lead to protectionism, noncooperation, tariffs, and stuff like that. And, in Europe, you are having a new uptrend in noncooperation. But I’m pretty sure that if Trump wins—and I do think he is going to win—he is going to increase the deficit. He talks about building up the military, building walls. These things cost money. And if the deficit goes up, which it would under a President Trump, that will give a short-term bump to economic growth. So maybe it is not as scary as people think.
Perhaps Gundlach is right, and if indeed Japan is the Gunniea pig for Helicopter money, who better to have on top of the US economy than a president who will follow closely in Japan’s footsteps, and boost fiscal spending, expand the deficit, and in the process greenlight the Fed to do even more QE, courtesy of hundreds of billions in more Treasurys that someone has to backstop will be bought in the coming years.
- Japanese Savers Flood Into Gold Fearing The Endgame Is Close
For all the talk about the surging yen as the biggest threat to Japan’s embattled economy, the truth is that there is another soaring currency (and asset) that is far more troubling for Shinzo Abe.
Gold.
While in past decades, the natural instinct of Japanese savers when faced with financial uncertainty has been to rush into the “safety” of cash (after all why allocate funds to government bonds that yield almost, or less, than nothing) as we recently showed in Safes Sell Out In Japan and Demand For Big Bills Soars As Japan Stuffs Safes With 10,000-Yen Notes, now something has changed. That something is increasing loss of faith in Japan’s currency.
Take the case of Tetsushi Kudo, a 50-year-old office worker, who as Bloomberg writes, bought a one-ounce gold coin this month for the first time. With stocks slumping and zero percent interest on savings, he says it won’t be the last.
“I want to buy gold every year as a birthday present for my daughter,” Kudo said at a store in Tokyo’s posh Ginza district where he made the 162,000 yen ($1,600) purchase. “She will thank me for the gift when she grows up because gold will have value wherever she goes.”
What a delightful epiphany: if ordinary, 50-year-old Japanese citizens can get it why not Nobel-prize winning economists?
Ignore that please.
Individual investors like Kudo drove a 60% jump in sales of the precious metal in June from May at Tanaka Holdings Co., the operator of Japan’s largest bullion retailer, as the yen’s rebound against the dollar made it more affordable. Why the surge into gold? Because far behind the glitzy facade of Abenomics, which is really just the BOJ intervening daily in the USDJPY via trust banks, and manipulating the Nikkei to give the impression that all is well, the people have checked out. According to Bloomberg, while Prime Minister Shinzo Abe’s ruling party scored a convincing victory in July 10 upper house elections, confidence in his economic policies is crashing. A July 2-3 Asahi newspaper poll showed 55% of those surveyed support a new direction versus 28% for maintaining course.
While both gold and the Yen have soared in 2016, it has been for oddly similar reasons. The yen’s 20% gain this year, slightly less than that of USD-denominated gold, has been a reflection of Japanese investors fleeing from overseas markets due to pessimism about global growth rather than confidence in their own economy. As for the reason why Japanese interest in gold has soared, it is an even simpler one: fear that the days of the Yen as a stable currency are numbered. Gold in yen terms has risen 7.5% this year, compared with the 28% jump in the dollar-based price of the metal
Gold sales more than tripled at Tanaka’s shops on June 24, when the Japanese currency jumped to an almost three-year high against the dollar after the U.K. decided to exit the European Union. Japan’s Topix stock gauge dropped the most in five years the day after the Brexit referendum, while 10-year sovereign bond yields tumbled further below zero.
“For investors, buying gold is similar to casting a no-confidence vote,” saidItsuo Toshima, 68, an investment adviser and former regional manager for the World Gold Council in Tokyo. “Gold is the unprintable currency, unlike the yen. The yen’s appreciation in spite of the adoption of the negative-rate policy has kindled skepticism about the policy’s benefits. It’s also led to investors seeking to protect their assets in case Abenomics fails.”
Another traditional lament said about gold is that it pays no dividend. Well, when the return on other “safe assets” is negative – as it the case in Japan – gold does have a relative real return. Indeed, gold’s lack of yield isn’t a big draw-back for investors at a time when almost 90% of Japanese government bonds have yields below zero, according to Eiichiro Kato, a general manager at Tanaka’s precious metals retail department. The benchmark 10-year JGB yield was at minus 0.28 percent on Monday.
And then there are the philosophical questions.
“We don’t know who will take responsibility for reducing Japanese government debt,” said Akihiro Morishige, a senior economist at Mitsubishi Research Institute.
What reduction in Japanese government debt?
“If trust in Japan’s fiscal policy decreases, Japanese long-term interest rates may soar towards 5 percent by 2030.”
Make that 500%.
What makes Japan’s gold rush more unique than in most countries is that many are not only buying gold as protection against a crash, they are storing it abroad as protection against confiscation as we reported last week. Japanese buyers of gold to store in Switzerland jumped 62% in the first six months from the second half of 2015 because of negative interest rates and concern the yen will eventually weaken, according to BullionVault Ltd., an online trading and storage company. Also: due to fears that Abe will pull an “Executive Order 6102”, and force gold confiscation from the population.
Meanwhile, as they flood into gold, Japanese investors are retreating from riskier assets as the nation’s shares plunge. Households’ holdings of equities decreased 9.9% from a year earlier at the end of March and investment trusts fell 3.7 percent while their cash and bank deposits rose 1.3 percent to 894 trillion yen, the second-highest amount on record, according to BOJ data.
“Gold is attractive because its prices don’t move much, compared with other assets,” said Kudo, the buyer of the coin in Ginza. “I may lose lots of money if I buy stocks without doing much research on them.”
Come to think of it, he is 100% right; making things worse, he may – and likely will – lose lots of money even if he buys stocks having done lots of research on them.
The good thing about gold: no research required for it to “work.” Only lots and lots of stupid politicians and economists. Luckily, we have more than enough of those.
Digest powered by RSS Digest
Saving...