- Germany: Beginning Of The End Of The Merkel Era?
Submitted by Soeren Kern via The Gatestone Institute,
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The anti-immigration party Alternative for Germany (AfD) surged ahead of Angela Merkel's Christian Democratic Union (CDU) in elections in her home state of Mecklenburg-West Pomerania.
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The election was widely seen as a referendum on Merkel's open-door migration policy and her decision to allow more than one million migrants from Africa, Asia and the Middle East to enter Germany in 2015.
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Merkel rejected any course correction on migration policy: "I am very unsatisfied with the outcome of the election. Obviously it has something to do with the refugee question. I think the decisions that were made were correct." She went on to blame German voters for failing to appreciate her government's "problem-solving abilities".
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Many of the AfD's positions were once held, but later abandoned, by the Merkel's CDU.
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A September 1 poll showed Merkel's popularity rating has plunged to 45%, a five-year low. More than half (51%) of those surveyed said it would "not be good" if Merkel ran for another term in 2017.
German Chancellor Angela Merkel suffered a major blow on September 4 when the anti-immigration party Alternative for Germany (AfD) surged ahead of her Christian Democratic Union (CDU) in elections in her home state of Mecklenburg-West Pomerania.
With 20.8% of the vote, the AfD came in second place behind the center-left Social Democrats (SPD) (30.6%). Merkel's CDU came in third place, with 19% of the vote, the worst result it has ever had in Meck-Pomm, as the state is called for short.
The election in Meck-Pomm was widely seen as a referendum on Merkel's open-door migration policy and her decision to allow more than one million migrants from Africa, Asia and the Middle East to enter Germany in 2015. The migrant influx has resulted in a notable increase in crime in the country. The growing sense of insecurity has been exacerbated by a series of attacks this summer by Muslim migrants in which ten people were killed and dozens more were injured.
The CDU debacle in Meck-Pomm yields two main conclusions: 1) Merkel's hopes of winning — or even running — for a fourth term in general elections in 2017 are now in doubt; and 2) the AfD is a force to be reckoned with in German politics. It can longer be simply dismissed as a "fringe party."
Observers from across the political spectrum seem to agree that the election in Meck-Pomm marks a turning point for Merkel, who has been head of the CDU since 2000 and chancellor since November 2005. Some say her political career may effectively be over if the CDU suffers heavy losses to the AfD in state elections in Berlin on September 18.
"This was a dark day for Merkel," said Thomas Jaeger, a political scientist at the University of Cologne. "Everyone knows she lost this election. Her district in parliament is there, she campaigned there, and refugees are her issue."
The CDU's secretary general, Peter Tauber, agreed: "The strong performance of AfD is bitter for many, for everyone in our party. A sizeable number of people wanted to voice their displeasure and to protest. And we saw that particularly in discussions about refugees."
The leader of the AfD, Frauke Petry, said: "This is a blow for Merkel, not only in Berlin but also in her home state. The voters made a clear statement against Merkel's disastrous immigration policies. This put her in her place."
German Chancellor Angela Merkel (left) suffered a major blow on September 4 when the anti-immigration party Alternative for Germany, led by Frauke Petry (right), surged ahead of her Christian Democratic Union in elections in her home state of Mecklenburg-West Pomerania.
Local AfD leader Leif-Erik Holm told supporters: "We are writing history. Perhaps this is the beginning of the end of Angela Merkel's chancellorship. This must be our goal."
Gero Neugebauer, a professor of political scientist at Berlin's Free University, said:
"People will see this defeat as the start of the 'Kanzlerdämmerung' (twilight of the chancellor). If a lot of CDU members start seeing this defeat as Merkel's fault, and members of parliament start seeing her as a danger for the party and their own jobs next year, the whole situation could escalate out of control. If the AfD defeats the CDU again in Berlin in two weeks, things could get ugly fast."
In an interview with Der Spiegel, Ralf Stegner, the vice president of the SPD, said the CDU was in a "state of panic" over the rise of the AfD and that Merkel has become a liability to her party:
"Merkel has clearly passed her zenith. It is a disaster for her that the CDU has fallen to third place with under 20% in her own state. This is a serious crisis for the CDU and it bears the names of Merkel and Seehofer. Some people now believe that Merkel no longer leads the debate with Seehofer about her 2017 candidacy. Throughout its history, the CDU has been merciless to its chancellors if there was the impression that the party was facing a massive loss of votes."
Stegner was referring to an August 27 report by Der Spiegel which said that Merkel has postponed an announcement about her candidacy due to opposition from the CDU's Bavarian sister party, the Christian Social Union (CSU), which has been increasingly vocal in its criticism of her migration policy:
"Angela Merkel will delay until the spring of 2017 her decision whether to run for another term as chancellor of the CDU in the general election next year. The delay was necessary because only then will CSU chief Horst Seehofer decide whether his party will support Merkel again, according to CDU insiders. This is the second time that Merkel has had to postpone the announcement of her plans.
"Actually, her decision should have been announced a long time ago. The original plan was that Merkel would declare her intentions as early as last spring. But then the refugee crisis and the fierce dispute with the CSU got in the way. The Chancellor decided to wait until this fall.
"This time the delay is more problematic for Merkel. In December, the CDU party congress takes place in Essen, where Merkel wants to be elected as party chairman for another two years.
"But she can only be party chairman if she is a candidate in the general election. The party congress should send a signal that the CDU fully supports the Chancellor. This will not work if the party does not know if Merkel wants to continue.
"From Merkel's perspective, the alternative would be more risky: If she announces her candidacy for chancellor without Seehofer's support, it could hurt her politically."
In a September 6 interview with Süddeutsche Zeitung, CSU leader Horst Seehofer, said the "disastrous" election outcome in Meck-Pomm was a direct consequence Merkel's migration policy. He added that Merkel had ignored "multiple prompts for a course correction" and that her refusal to budge threatens the future of the CDU. "Confidence in the government is dwindling rapidly," he warned. "People do not understand how policy is made in Germany."
CSU Secretary General Andreas Scheuer reiterated the call for Merkel to change course: "We need a cap on refugees, faster deportations and better integration."
Bavarian Finance Minister Markus Söder agreed: "The result must be a wake-up call for the CDU. The mood of the people can no longer be ignored. A change of course is needed in Berlin."
Merkel remains defiant. A day after the debacle in Meck-Pomm, Merkel rejected any course correction on migration policy:
"I am very unsatisfied with the outcome of the election. Obviously it has something to do with the refugee question. I think the decisions that were made were correct."
She went on to blame German voters for failing to appreciate her government's "problem-solving abilities" (Lösungskompetenz).
On September 7, in a fiery address to the German parliament, Merkel said the AfD's anti-immigration stance posed a threat to Germany. "All of us should realize the AfD is a challenge not only for the Christian Democrats… they are a challenge for everyone in this house." She may also have indicated that she intends to seek another term as chancellor when she said: "There is still a lot of work to be done."
Alternative for Germany (AfD)
In more ways than one, Angela Merkel is directly responsible for the rise of the AfD. In her more than ten years as chancellor, she has moved the CDU to the left on so many key issues that the party is no longer conservative in any meaningful sense of the word.
Under Merkel, the CDU's policies on nuclear energy have become essentially identical to those of the Green Party. Merkel has also adopted many of the social policies of the SPD. In terms the open-door migration policy, the CDU's position is virtually indistinguishable from both the SPD and the Greens. This has created an opening for the AfD.
Launched in 2013, the AfD is now present in nine of Germany's 16 state parliaments. It is poised to enter the federal parliament for the first time in 2017. According to an Insa poll cited by Bild on September 5, if the national election were held today, the AfD would win 15% of the vote, making it the third-largest party in Germany.
The Insa poll also found that in the Meck-Pomm election, the AfD siphoned off more than 55,000 votes from other parties. More than 22,000 CDU voters cast their ballots for the AfD; 15,000 SPD voters voted for the AfD; and more than 22,000 voters affiliated with other parties gave their votes to the AfD.
The party was originally founded to protest the German government's handling of the eurozone crisis. Its founding manifesto stated:
"The Federal Republic of Germany is facing the most serious crisis in its history. The euro currency area has proved to be unworkable. Southern European countries are sliding into poverty under the competitive pressure of the euro. Entire states are on the verge of default.
"Hundreds of billions of euros have already been pledged by the federal government. An end to this policy is not in sight. This is excessive and irresponsible. We, our children and our grandchildren will have to pay for this with taxes, stagnation and inflation. At the same time, this is eroding our democracy. In this situation, the CDU, CSU, SPD, FDP and the Greens know only one answer: Keep it up!"
In April 2013, the Frankfurter Allgemeine Zeitung revealed that CDU insiders viewed the rise of the AfD as "the end of Merkel's chancellorship." A strategy was set in place to conduct opposition research and paint the AfD as a "national conservative" party driven by proponents of "market radicalism."
The AfD — similar in many ways to the upstart Tea Party movement in the United States — has suffered self-inflicted wounds as a result of political infighting and internal power struggles. Establishment politicians and the mainstream media have repeatedly seized on outrageous comments made by some within the party to portray it as a "far right" party that poses a threat to German values.
In an interview with the Guardian, Frauke Petry, the AfD leader, said the party has sometimes felt forced to use outspoken language to get its message across. She said:
"Well, sometimes, I don't deny, we think we have to use provocative arguments in order to be heard. Because we tried very hard at the beginning of 2013 to be heard with lots of very sensible thinking and arguments, and we simply couldn't get through to anyone. So what do you do? You put forward a provocative argument, and sometimes you are given the chance to explain what you meant. I know it's a difficult choice to make but sometimes, for us, it feels like the only way."
Petry also said the AfD is not opposed to "real refugees," but it is against the hundreds of thousands of economic migrants who are posing as refugees. "There is enough space for refugees in Germany, but the problem is that we don't distinguish anymore between migrants and asylum seekers," she said.
A comprehensive party manifesto published in May 2016 called for: limited government; term limits; campaign finance reform; reducing the power of political parties; direct elections for chancellor; devolving power to federal states; a referendum on the euro; reforming the United Nations; a strong military based on the NATO alliance; reintroducing conscription; stronger police enforcement; justice reform; gun rights; protecting German borders; labor market reform; eliminating burdensome bureaucracy; promoting the traditional family; encouraging Germans to have more children rather than resorting to mass migration to fix its demographic problems; protecting the rights of the unborn; promoting German culture rather than multiculturalism; promoting the German language as the basis for German identity and for integration; banning the foreign financing of mosques; eliminating government subsidies for radio and television; and so on. Many of the AfD's positions were once held, but later abandoned, by the CDU.
Meanwhile, a September 1 poll for ARD television showed Merkel's popularity rating has plunged to 45%, a five-year low, and down from a high of 67% one year ago. More than half (51%) of those surveyed said it would "not be good" if Merkel ran for another term in 2017. If national elections were held today, the CDU would win just 33%, down from 42% one year ago.
The poll showed one factor in Merkel's favor: the lack of a political rival strong enough to challenge her.
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- AsiaPac Stocks Plunge Most In 8 Months As China Money Market Turmoil Accelerates
Hong Kong Interbank borrowing rates spiked to 6-month highs as a combination of central-planning-inspired liquidity restriction and global 'risk-off' strikes. 3M HIBOR spiked 95bps to 4.21% – its highest in 6 months; and Chinese stocks are feeling the pain, tumbling most in 3 months. Having reached historical lows in volatility, it appears 'pent-up' anxiety is coming back with fury. The broad-based MSCI Asia APEX 50 index is down 3.5% – the most in 8 months…
And Chinese stocks are displeased…
India is down most in a month…
And Indonesia is down most in 7 months…
"It's probably nothing"
Charts: Bloomberg
- Samsung Sheds $20BN Of Market Cap In 2 Days After Recalling Exploding Phones
Turns out spontaneous pocket explosions are not a desirable feature for smartphone consumers…just ask Samsung. The company was forced to recall 2.5mm phones last week after reports surfaced of the device exploding during or after charging. That doesn’t look healthy.
Get your exciting Samsung Galaxy Note7 “Pocket Bomb” here #samsung #explode #notegate https://t.co/j91ErOsxU6
— Robert Follis (@robfol) September 2, 2016
Meanwhile Samsung shareholders have suffered the biggest 2-day price drop since Lehman, with the stock shedding nearly $20 billion in market cap. The recall is expected to cost $1BN but the brand value destruction is obviously much higher with Apple simply having to make phones that don’t spontaneously combust to win over consumers.
Meanwhile the FAA has warned airline passengers not to turn on or charge Galaxy Note 7 devices on board aircraft and not to stow them in any checked baggage.
FAA Statement on Samsung Galaxy Note 7 Devices https://t.co/NADpT5Jma4 pic.twitter.com/e9uJvNmUUq
— The FAA (@FAANews) September 8, 2016
But the video made it look really cool…
- 911 and the Lost American Culture
911 is an event that changed America forever. Probably that can be said for many such events like Pearl Harbor, the sinking of the Lusitania, or the day the Allies ‘won’ World War 2. But 911 is a lot more complicated, probably just because it’s an event that was in line with the times, culture, and changing world. And as we explain in Splitting Pennies – a lot of money was made on Forex trades.
Everything that was before 911 was no more. From the date of 911 until now, America has been preoccupied with war, security, and various emergencies. It’s no coincidence that this event is known as ‘911’ which is the emergency code Americans dial. America is in a state of emergency.
911 was the paradigm game changer of our century. As we understand this event better, we can better understand markets and the world as it really is, and better ourselves for a brighter more prosperous future.
Some personal experiences not found in the ether
911 has been so well analyzed and documented by so many researchers. Thanks to all of them. Here’s some subjective experiences no one ever knew.
In the year 2000 a group of investors had been assembled via Private Placement Memorandum in Palm Beach County to invest 20 Million USD in the development of an intelligent stock trading algorithm, we code named the project ADTS “Automatic Day Trading System” (which was heresy in that time “Program Trading”). The investors were all committed based on the involvement of an Italian Illuminati Investment Banker with the initials BT (now deceased). We were fully subscribed in July of 2001 and in August I was personally looking for office space for our startup. Among the locations I was investigating were the twin towers (one of our backers was an NYSE insider, Wall St. seemed an appropriate place to operate) although practically, we probably would have chosen south Florida, as the majority of the founders were based in Palm Beach County at that time, as well as BT.
The morning of 911 I remember waking up with the sun, unusual for me (i’m an alarm clock guy, i can’t wake up with the roosters). It was a beautiful sunny day in Palm Beach I remember opening all doors on my house and enjoying the nice morning with no clouds. Later I would learn how all the clouds were sucked out to sea by a hurricane Erin that reversed course strangely, exactly on the morning of 911. It was headed for NYC almost exactly to where the twin towers were, ironically, before it changed course. But, it sucked all the bad clouds, gasses, and other atmospheric elements (pressure) into it ensuring a clear game day for a historic, epic black op.
Those who can remember this day, remember the fear, shock, confusion, anger, and overwhelming emotions even for the most fervent anti-government rebel. We felt as America was under attack – but from whom? From what? How? We watched TV. We watched mutliple TVs. There wasn’t any Zero Hedge in that time, most news websites were copies of their TV programs, and what alternative news there was, lacked the depth of information that they have today. Today, everyone has an HD camera in their pocket, back then, smartphones hadn’t been popularized yet.
So later in the day, I got a call from BT “It was Bin Laden” .. silence. I thought, what a strange comment. I didn’t even know who this character was. After receiving a small lesson about the Mujahadeen, later I was explained that we’ll be soon going to war in Afghanistan, and that we should consider moving our operations for our business to another country (for a number of reasons but mostly, the non-US investors were afraid of Americas’ stability, and also that the climate of war is not productive for developing intelligent trading systems). All this info was told to me the same day of the attack. Now I was by no means an insider, I have no knowledge of who provided this information to BT, but at the time it wasn’t really of any interest to me to ask.
The strange email chain
I’m not sure how I got on this email chain, but it was 2001, a time of chain letters, there was no social media. I was emailed to a group, all the group was CC not BCC, with video attachments – my limited DSL was slow to download them, don’t remember many details about the videos, but the text of the email I remember clearly. In all caps, the emailer explained that they have RECORDED SHOOTING DOWN OF AN AIRPLANE WITH HOME VIDEO, MANY MILITARY VEHICLES AND CRAFT. PLANE POSSIBLY SHOT DOWN BY ANOTHER PLANE, OR IN COMBINATION WITH SURFACE TO AIR MISSILES. MILITARY BANGING ON DOOR – PLEASE FORWARD THESE VIDEOS TO EVERYONE YOU KNOW. OUR ADDRESS IS ….. PA OUR EMAIL IS… OUR NAME IS.. OUR PHONE IS.. OUR CHILDREN ARE LOCATED AT… silence.
I never saw this email chain or this home video surface years later. At the time, I had been preoccupied with my own moving to New Zealand and unfortunately don’t have the records of this, it was in hindsight a huge mistake not keeping better records of such things. But with all the strange mistakes made by the MSM at the time, this seemed like just one of a hundred little ‘quirks.’
But there were a lot of strange things about Flight 93, such as the FBI reports of White Angels, claims that it was shot down (much like the email said), and no physical crash evidence:
WHERE’S THE PLANE? LET’S CREATE A MAN-HUNT!
Pratically speaking, we’ll never know 100% of what happened, because whoever executed this black op destroyed all the evidence, and key people died of mysterious causes. But due to the honorable and diligent research by millions- there certainly is a MASSIVE GIANT POINTING FINGER
- Elon Musk: "We Have Not Ruled Out" That UFO Caused Space X Explosion
@ashwin7002 @NASA @faa @AFPAA We have not ruled that out.
— Elon Musk (@elonmusk) September 9, 2016
The statement by the vaunted entrepreneur that he couldn’t rule out that UFO hunters were correct that an unidentified object or weapon initiated the explosion has alien enthusiasts out in full force.
The frenzied excitement for alien hunters hit new heights on Friday when the innovative wunderkind Elon Musk wrote to a commenter on Twitter that "We have not ruled that [a UFO hitting the Space X Falcon 9 rocket] out" with theories ranging from an attack by foreign defense forces to a laser attack by an alien ship quickly cascading through social media.
The statement comes one week after self-proclaimed UFO hunters pointed to video footage from the SpaceX explosion noting that there was a black object barreling near the rocket only seconds before explosion with YouTube viewers quickly dispatching theories that the flying object was a bird or a bug based on the relative speed of the object – over 1,000 MPH – and its appearance behind riggings that ruled out the possibility that it was a bug in the camera lens.
The explosion quickly consumed the rocket destroying Facebook’s AMOS-6 internet-beaming satellite and causing unprecedented damage to the launchpad – a fairly unusual incident for a rocket explosion. Musk said the explosion was "really a fast fire" and was unable to point to specific mechanical causes for the failure of the rocket.
One Twitter user said that the sound at 54 seconds in a video posted "sounds like a metal joint popping under stress" which Elon Musk said was "most likely true" but also said that "we can’t yet find it on any vehicle sensors" pointing to the possibility of some outside sabotage.
"Important to note that this happened during a routine filling operation. Engines were not on and there was no apparent heat source," said Musk questioning how the rocket could spontaneously erupt in flames. "Particularly trying to understand the quieter bang sound a few seconds before the fireball goes off. May come from rocket or something else."
One person suggested that it could be a drone, but opined that if it was a drone it was a particularly fast and circular drone that does not match the description of any known existing defense products. Others opined that whatever the flying vehicle that may have given rise to the explosion, it appears it was a "well planned attack from a competitor."
Although speculation continues to circle around the explosion of the Space X Falcon 9 rockets with the most fascinating theory by far being the potential that space aliens beamed the rocket, many more plausible alternatives exist including a leak of propellant fuel, metal on metal contact sparking just enough initial flame, or a buildup of oxygen. Some commenters are even blaming Vladimir Putin and/or China – which makes maybe less sense than even space aliens.
The truth is out there…
- Is A VaR Shock Just Starting: Here Is The Checklist
Last Thursday, when the S&P was once again surging to within a fraction of taking out its all time high, we warned readers to "Brace For "VaR Shock" – How The Bank Of Japan May Be About To Unleash A Global Selloff." Of particular interest was whether 10Y JGB yields would soar, now that the market was questioning the BOJ's resolve to keep longer rates under control, leading to a risk-contagion scenario like the one seen in 2003, when Japanese bond yields exploded. We then said that "what that selloff – in a time of soaring cross-asset correlations, record quant leverage and virtually non-existent market liquidity – would mean for equities, we don't know, – but thanks to Haruhiko "Peter Pan" Kuroda, we will soon find out."
Well, the timing of the post could not have been better, because we got our answer the very next day when – just as predicted here on Thursday – as a result of crashing bond MTMs – the very definition of a VaR shock – global stocks suffered their first aggressive global selloff in months, the biggest one in fact since Brexit, as trader attention, which has been ignoring pretty much every development and key news update over the past two months assuming instead that central banks "have it covered", finally focused on the sharp selloff in long-dated global bonds leading to cross-asset liquidation and sharp quant deleveraging, as we predicted just hours earlier.
Friday's selloff, incidentally, also took place just two days after JPM's head quant, Marko "Gandalf" Kolanovic issued a new stark warning: "Volatility Is About To Surge", due to catalysts which – as we explained in the post – included this month's central bank (ECB, BOJ, Fed) meetings, seasonals pushing market volatility higher, and leverage in systematic strategies and option positioning provide fuel for volatility. We bring this up just to silence all those peanut gallery complainers that Kolanovic "has no idea what he is talking about."
But while Kolanovic's arguments confirm that our prediction of an imminent VaR shock is correct, another influential JPM analyst, Nick Panigirtzoglou, author of JPM's Flows and Liquidity weekly snapshot, is just fractionally more optimistic and says that while a VaR shock is a distinct possibility, he notes that "not all conditions underpinning VaR shocks are currently in place in either equity or bond markets." We disagree, but that's what makes a market. As such, we present his thoughts on the matter, and let readers decide just where in the imminent VaR shock continuum we find ourselves.
Here is Panigirtzoglou's attempt to mitigate some of the long, long overdue fears of a risk off response to another round of central bank mistakes, and his take on whether September 2016 is set to be this year's major "tantrum" event which first sweep Japanese and European bonds, and then quickly spreads across the global impacting all asset classes.
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Market volatility declined further over the past month raising more concerns about complacency. Are investors too complacent currently? Are current market conditions inducive to a VaR shock? And VaR shocks do not necessarily need a fundamental trigger such as policy changes or political events. Examples of fundamental or policy triggered VaR shocks were the taper tantrum of May 2013, the Chinese devaluation of August 2015 and more recently the Brexit vote. VaR shocks can simply occur if, for example, investor positions normalize from previous extreme levels. Examples of such non-fundamental VaR episodes were those that took place in April 2013 in the JGB market or in April 2015 in the Bund market.
So, according to the Greek JPM analyst (not to be confused with his nemesis on this issue, the Croatian one), how likely are such shocks in the current conjuncture? According to JPM, there are certain conditions underpinning the emergence of VaR shocks:
1) Low volatility. Low market volatility induces investors, most of whom employ some type of volatility-based risk management framework, to increase the notional size of their positions as volatility collapses. The same investors are forced to cut their positions when hit by a shock, triggering self- reinforcing volatility-induced position shedding. Examples of VaR sensitive investors are hedge funds such as risk parity funds, asset managers, banks that set limits against potential losses in their trading operations by calculating Value-at-Risk metrics. Historical return distributions and historical market volatility measures are typically used in VaR calculations given the difficulty in forecasting volatility. This in turn induces these investors to raise the size of their trading positions in a low realized volatility environment, making them vulnerable to a subsequent volatility shock.
2) The market to be “trading long”. VaR shocks tend to materialize following an overhang of extreme long equity or duration exposures. How elevated are investor positions currently? The equity betas we regularly update in Charts A20 and A21 show a rather mixed picture. While systematic hedge funds such as risk parity funds and CTAs have high equity exposures currently, discretionary managers such as Discretionary Macro and Equity Long/Short hedge funds appear to have reduced their equity exposures recently. So not all hedge fund sectors are high in terms of their equity exposures.
The picture is also mixed in the bond space. For example in our European client survey, while Euro area single currency investors have still pretty high duration exposure at 0.36 years, multi-currency investors are close to neutral. Both of these position indicators were very elevated at the beginning of 2015, just before the April 2015 Bund VaR shock. By taking into account both the blue and the black line in Figure 2 the picture we are getting is of less extreme positioning in Euro area bonds than in April 2015
We mentioned banks as typical VaR investors. Are US banks too long duration? The Fed's H.8 release provides some guidance on this for US banks. Each week, the Fed reports the net unrealized gain on banks’ available for sale securities. This is by no means a complete measure of banks’ duration exposure. It does not include held to maturity portfolios (albeit these are much smaller than AFS portfolios), and importantly does not include the impact of any swap hedges. That said, we can infer banks’ duration exposure by relating week-to-week changes in unrealized gains to week-to week changes in the yield of our UST 10y yield. Figure 4 shows this beta, estimated over a rolling 3-month window to smooth through the noise in the estimate. It suggests that banks would make MTM losses on their available for sale portfolios of around $15bn for each 1% increase in the 10y yield. Abstracting from the volatility post last August’s episode, the current reading is rather negative i.e. US banks are rather long duration, albeit not far from the middle of its historical range.
An alternative way of gauging positions is to look at the response of equity and bond markets to economic news. This is shown in Figure 5 and Figure 6 which look at the behavior of equity prices and bond yields to economic surprises. An environment where long equity positions are heavy should see equities responding by more to negative economic news than to positive news. That is, the beta of equity prices to negative news should be higher than their beta to positive news. An environment where long bond duration positions are heavy should see bond yields responding by more to positive economic news than to negative news. That is, the beta of bond yields to positive news should be higher than their beta to negative news. The bond market is currently trading close to “neutral” according to this indicator, in contrast to the overhang of long positions seen in April/May 2015 during the “Bund VaR shock”. Similarly, the equity market is trading close to “neutral”, in contrast to the overhang of long positions seen in May this year and December last year.
Taking together, the above indicators do not currently point to overstretched equity or duration positions.
3) Stretched valuations. Admittedly this is a harder to assess metric especially on an absolute basis. On a relative basis valuations for JGBs or Bunds looked very expensive during the April 2013 and April 2015 VaR episodes, respectively. One simple way of illustrating this is via a bivariate regression of the 5y5y forward swap rate in Japan or the Euro area on its US counterpart and on the 2y spot rate differential vs. the US. This is shown in Figure 7. The residuals were very negative i.e. valuations were very expensive, for Japanese rates in April 2013 and for Euro area rates in April 2015. According to Figure 7 these residuals look a lot more “normal” i.e. close to zero, currently. In the equity space, a simple visual inspection of 12m forward PE multiples shown in Figure 8 suggests that the previous relative expensiveness of European and Japanese equity markets, the equity markets that corrected the most since August 2015, has more than unwound. In all, not all conditions appear currently in place for a VaR shock as low market volatilities are combined with rather mixed investors positions and valuation signals
Regarding market volatilities it is also important to remember that while vol is low, it is not cheap. In fact the opposite is true. Volatility is rather expensive as we highlighted in this month's Cross Asset Volatility Strategy publication (Sep 8th). Implied volatilities have indeed declined to levels last seen n August 2015, before the equity market correction. However, realized volatilities have declined even more sharply. This is also shown in Figure 9 which constructs a cross asset 1- month Realized vol metric based on the same indices and weights as the ones used for our Implied volatility metric. This Realized vol metric currently stands at the lowest level since October 2014! The greater fall in realized vs. implied volatilities means that vol risk premia increased sharply over the past month making vol even more expensive as an asset class. The ratio between our cross-asset Implied and Realized vol metrics stands at well above one, at 1.3x currently. In other words there are hefty risk premia embedded in option markets that are more indicative of skepticism rather than complacency. And this particularly true with retail investors who continue to pour money into VIX ETFs (Figure 10), despite the very negative carry. As a result of the extreme steepness in the VIX futures curve, popular VIX ETFs are currently losing around 10% per month due to negative roll. If no shocks materialize over the coming months, it is likely that negative-carry long- VIX positions are taken off, exerting downward pressure on the steepness of the VIX curve, from currently “bubble” like levels.
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And there you have it: on one hand JPMorgan – via Kolanovic – expects a major selloff, potentially as much as 20% should central banks not come to stocks' bailout this time; on the other hand you have JPM – via Panigirtzoglou – explaining that the "other" JPM guy is wrong, and that the conditions for a VaR shock are only modest embedded right now. Which, of course, is good news if only for the bears out there: after all if everyone was expecting an aggressive continuation of Friday's plunge, it would be assured that that would not happen. However, now that JPM's Greek fund flow expert has inject a trace of doubt that the VaR shock may happen, the contrarian selloff may well continue.
Luckily, there will be a quick and easy way to find out of Panigirtzoglou is wrong: keep an eye on JGB trading overnight. If we the banchmark bond's yield surges, and if the Nikkei is getting whacked, the answer will be obvious: major quant and CTA funds are now deleveraging and until they are finished, there will be no rebound for the market for the time being. In fact, if central banks really think they can extricate themselves from micro managing the market and the economy (with only failure to show for it), then the next leg lower in the S&P500 could make on dizzy.
In the end, it will all be about what Kuroda – central bank governor of the country that has almost all negative yielding paper in the world – with does and says in the next few hours because if the BOJ reveals yet one more disappointing surprise, all bets may just be off. As to where the 10Y JGB ends up trading, we don't know, however we do know that a lot of investors will be crushed if the "frontrun the BOJ" trade no longer works; in that case the TINA option, or there is no alterative to holding stocks, will promptly be replaced with a "lack of alternative" to holding cash. At least, until, such time as the Ken Rogoff proposal to ban cash is fully implemented and the next and final leg of the monetary policy cycle arrives, the one which ends in hyperinflation and the collapose of the global reserve-based system.
- Chair of University Engineering Department: Fire Did NOT Cause Collapse of Third Building on 9/11
Today, the Chair of the Department of Civil and Environmental Engineering at the University of Alaska, Fairbanks, a PhD in structural engineering and one of the nation’s top experts in the cause of building collapses (Leroy Hulsey) publicly announced that – contrary to the government’s explanation – fire did NOT bring down World Trade Center building 7 on 9/11:
He joins scores of other structural engineers, civil engineers, high-rise architects, and fire experts who say that the government’s story is false … Building 7 was NOT brought down by fire.
And see this.
- Maker Of Drug Fueling Heroin Overdose Epidemic Is Lobbying To Keep Weed Illegal
Submitted by Carey Wedler via TheAntiMedia.org,
In 2016, cannabis is still illegal in many parts of the country, and pharmaceutical giant Insys Therapeutics Inc., a manufacturer of fentanyl, just demonstrated much of the reason why.
Arizona is currently gearing up to vote on legalizing recreational cannabis. Ahead of that vote, Insys just contributed $500,000 in the fight against Proposition 205, U.S. News and other outlets report.
The Arizona-based pharmaceutical company recently gave the funds to Arizonans for Responsible Drug Policy, an anti-legalization campaign group actively fighting to defeat the ballot measure.
Insys’s contributions are particularly unsettling considering the company currently markets only one product — a spray version of fentanyl, a powerful opiate.
Fentanyl has become one of the country’s most dangerous prescription drugs. It is more potent than traditional addictive opiates, which already claim thousands of lives every year and drive addicts to graduate to heroin use. Fentanyl is 50 times stronger than heroin and has been linked to a growing number of deaths in the United States. It is particularly dangerous when sold on the street and cut with other drugs. Fentanyl has been blamed for worsening the sharp rise in heroin overdoses as dealers across the country have begun adding it to heroin to make it stronger.
Yet Insys and opponents of legalization are more concerned about a plant.
According to Arizonans for Responsible Drug Policy, “four states and the District of Columbia have already legalized [cannabis] and are seeing disastrous repercussions for their youth, workplaces and communities.”
Of course, this assessment is incorrect.
Colorado has lower rates of teen cannabis consumption than the national average, and studies have shown driving while under the influence of the plant is far less dangerous than alcohol, a legal drug. Colorado has seen a spike in tourism, business, and tax revenues as a result of legalization.
Interestingly, a study by Johns Hopkins university last year found states with medical marijuana had lower rates of overdose from opiates.
In spite of Arizonans for Responsible Drug Policy’s claims they care about communities, it is completely comfortable taking half a million dollars from a company that produces one of the most toxic and addictive drugs on the market. Unsurprisingly, Insys previously sold a synthetic cannabis product and has already gained approval from the FDA to launch a similar one in the near future. These business ventures provide an even deeper understanding of why they oppose legalization.
“[W]e are truly shocked by our opponents’ decision to keep a donation from what appears to be one of the more unscrupulous members of Big Pharma,” J.P. Holyoak, chairman of the Campaign to Regulate Marijuana like Alcohol said.
His statement continued:
“Our opponents have made a conscious decision to associate with this company. They are now funding their campaign with profits from the sale of opioids – and maybe even the improper sale of opioids. We hope that every Arizonan understands that Arizonans for Responsible Drug Policy is now a complete misnomer. Their entire campaign is tainted by this money. Any time an ad airs against Prop. 205, the voters should know that it was paid for by highly suspect Big Pharma actors.“
Considering the myriad healing properties of cannabis, it is obvious why a pharmaceutical company in the business of selling powerful painkillers is eager to invest in maintaining prohibition. Legalizing and normalizing cannabis pose a direct threat to pharmaceutical profits considering cannabis is effective at treating pain, anxiety, degenerative diseases, and potentially even cancer. Though much more research is needed to determine the true efficacy of cannabis as medicine, the federal government’s insistence on keeping it illegal stifles further scientific examination.
There are legitimate concerns about treating cannabis like alcohol — namely, that convoluted regulations make legalization a bureaucratic headache compounded by the substance’s illegal status with the federal government. Nevertheless, powerful interests are aggressively trying to keep cannabis illegal — Insys’s donation is the largest any group associated with Proposition 205 has received.
Around the country, the pharmaceutical fight against legalization is joined by the tobacco lobby, the alcohol lobby, the private prison lobby, and law enforcement.
Still, U.S. News reports the ballot measure is gaining popularity among Arizonans. While corporate cash has been known to influence election outcomes, only time will tell if Insys’s desperate attempts to keep a plant illegal will sway voters.
- DOJ Study Finds "Real And Nearly Unprecedented" Spike In Homicides Around U.S.
We have frequently written about rising violent crime around the U.S. with an emphasis on the soaring homicides in Chicago which are up nearly 50% YoY (see recent posts here and here). Now it seems as though others in the mainstream media are starting to take notice.
The New York Times recently compiled data from around the country and found there were nearly 6,700 homicides reported in the 100 largest cities in 2015, a YoY increase of 950 or roughly 17%, with nearly half of the rise — 480 of the 950 — coming from seven cities. Their study is tied to a June 2016 report published by the National Institute of Justice in which Richard Rosenfeld, a criminology professor at the University of Missouri-St. Louis, declared that “the [2015] homicide increase in the nation’s large cities was real and nearly unprecedented.”
Murder rates rose significantly in 25 of the nation’s 100 largest cities last year, according to an analysis by The New York Times of new data compiled from individual police departments.
The findings confirm a trend that was tracked recently in a study published by the National Institute of Justice. “The homicide increase in the nation’s large cities was real and nearly unprecedented,” wrote the study’s author, Richard Rosenfeld, a criminology professor at the University of Missouri-St. Louis who explored homicide data in 56 large American cities.
In the Times analysis, half of the increase came from just seven cities — Baltimore, Chicago, Cleveland, Houston, Milwaukee, Nashville and Washington.
The map below highlights the cities with the biggest spikes in YoY murder rates from 2014 to 2015. That said, the data doesn’t speak to the continued rise in violence so far in 2016 with Chicago homicides up nearly 50% YoY.
And here is a look at the YoY increase in homicides in the top 56 cities of the U.S. courtesy of the National Institute of Justice report from June 2016.
The chart below helps illustrate just how pervasive the homicide spike across the country is with the most cities reporting a substantial spike in YoY murders since the early 90s.
Meanwhile the New York Times attributes the spike in violent crime to a variety of issues including poverty, lack of aggressive policing in the wake of protests related to “high-profile police killings of African-Americans”, and increased drug usage.
In his study, Dr. Rosenfeld said that rising crime might be linked to less aggressive policing that resulted from protests of high-profile police killings of African-Americans. But he said this hypothesis, a version of the so-called Ferguson effect, which has spurred heated debate among lawmakers and criminologists, must be further evaluated.
Some experts attribute the sudden spike in violence largely to a flood of black-market opiates looted from pharmacies during riots in April 2015. The death of Freddie Gray, a young black man who sustained a fatal spinal cord injury in police custody, had set off the city’s worst riots since the death of the Rev. Dr. Martin Luther King Jr.
During the riots, nearly 315,000 doses of drugs were stolen from 27 pharmacies and two methadone clinics, according to the Drug Enforcement Administration, a number much higher than the 175,000 doses the agency initially estimated.
The “why now” question is something we recently addressed in another post entitled “Milwaukee Homicides Soar – What Is Going On In the Murderous Midwest?“. While the typical explanations for violent crime (e.g. poverty, unemployment, etc.) may explain why crime is higher in certain cities it certainly doesn’t explain why the sudden spike is occurring now. Thomas Abt of the Harvard Kennedy School of Government thinks the sudden spike is more likely due to the “Ferguson Effect” or a concept he refers to as “legal cynicism.”
The key question is why the spike in violence now? Ask any “expert” to explain the cause of violent crime and you’ll get a range of responses from systemic problems of poverty, unemployment, lack of education of inner city youth, breakdown of the family unit, etc. The problem is that none of those things explain the sudden changes in violence we’re currently witnessing in the Midwest.
Thomas Abt, senior research fellow with the Harvard Kennedy School of Government, believes the issue is more likely what other political commentators have dubbed “the Ferguson Effect.” Writing for The Marshall Project, Abt discussed what he thought might be causing the sudden spike in violent crimes in the Midwest:
It is unclear what is driving the problem, but my own hunch – and it is still just a hunch at this point – involves a criminological phenomenon called legal cynicism. Multiple studies have demonstrated that, controlling for other factors, when communities view the police and criminal justice system as illegitimate, they become more violent. When people believe the system is unwilling or unable to help them, they are more likely to take the law into their own hands, creating the cycles of violent retribution that were chronicled so vividly last year in Jill Leovy’s Ghettoside.
The “Ferguson Effect” explanation does seem to be supported by a substantial and sustained spike in Baltimore homicides after the Freddie Gray death.
The question is how comments like the ones below from our commander-in-chief impact whether people “view the criminal justice system as illegitimate”?
September 2014 Comments at the Congressional Black Caucus Awards Dinner – “Too many young men of color feel targeted by law enforcement, guilty of walking while black, or driving while black, judged by stereotypes that fuel fear and resentment and hopelessness. We know that, statistically, in everything from enforcing drug policy to applying the death penalty to pulling people over, there are significant racial disparities.”
November 2014 Comments Regarding Ferguson grand jury decision – “The law too often feels like it’s being applied in a discriminatory fashion….Communities of color aren’t just making these problems up….These are real issues. And we have to lift them up and not deny them or try to tamp them down.”
May 2015 Comments at Lehman College – The catalyst of those protests were the tragic deaths of young men and a feeling that law is not always applied evenly in this country. In too many places in this country, black boys and black men, Latino boys, Latino men, they experience being treated differently by law enforcement — in stops and in arrests, and in charges and incarcerations. The statistics are clear, up and down the criminal justice system; there’s no dispute.
We’ll let you be the judge of that.
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