- Massive Explosions Rock Jakarta In Apparent Suicide Bombings; Gunfire, Casualties Reported
Two months after the Paris explosions of November 13, it appears that terrorism has struck again, this time in Indonesia’s capital, Jakarta where moments ago, at least six bomb explosions, gunfire and casualties were reported, with at least one of the explosions taking place near the local UN office.
ANTARA NEWS REPORTS SIX EXPLOSIONS IN CENTRAL JAKARTA
JAKARTA POLICE SUSPECTS BOMB AT TRAFFIC POLICE POST: METRO TV
JAKARTA POLICE, GUNMEN CONTINUES SHOOTING: METRO TV
BREAKING: Massive explosion rocks central Jakarta, with at least 1 person dead; Gunshots heard.
— The Associated Press (@AP) January 14, 2016
What we hear so far. Unconfirmed reports:
1. Multiple IEDs activated.
2. Active shooters present.
3. One (or more) KIA
#JakartaBlast— Ruli Harahap (@ruliharahap) January 14, 2016
#INDONESIA‘S NATIONAL POLICE SPOKESMAN SAYS CENTRAL #JAKARTA #EXPLOSIONS SUSPECTED TO HAVE BEEN CARRIED OUT BY #SUICIDE BOMBER @Reuters
— Global Markets Forum (@ReutersGMF) January 14, 2016
@TMCPoldaMetro Suasana TKP sesaat setelah bom meledak di sebuah kafe di Jakarta Pusat. pic.twitter.com/UbPb448X2s
— Ramdans Muhammad (@Rockramdans) January 14, 2016
Serious exchange of fire in downtown #Jakarta. Didn’t experience this in 3.5 years in #Pakistan
— Jeremy Douglas (@jdouglasSEA) January 14, 2016
Police now backing-up & security announcement to stay away from windows, & telling folks to retreat from lobby
— Jeremy Douglas (@jdouglasSEA) January 14, 2016
Korban ledakan bom di Sarinah, Thamrin. Apakah mereka pelakunya? pic.twitter.com/YXSxWgkz2A
— Pujiono JS™ (@PujionoJS) January 14, 2016
And folks in office saying think it is a #Paris type #foreignfigthers #ISIS supporters attack. Given 500 in #Syria wouldn’t be huge surprise
— Jeremy Douglas (@jdouglasSEA) January 14, 2016
As of this moment, the explosions appear to be yet another suicide bomber-driven terrorist attack, and we suspect it is only a matter of time before ISIS takes credit.
The local stocks have reacted dramatically:
A live feed of the event is available below:
Livestream @KompasTV on Jakarta, #Indonesia blast: https://t.co/Ccq8194Nfn pic.twitter.com/nxnhEnak1L
— Steve Herman (@W7VOA) January 14, 2016
- This Is What The Powerball Ticket Line Looked Like In Nevada
Seven years ago, America was promised hope and change. The change never came, but at least there is still hope, and it comes in the form of a voluntary tax known as the Powerball lottery. The only problem: it happens to be everyone else’s hope too, and to even get a chance to buy a ticket, one has to wait in lines such as this one on the California-Nevada border.
The line to buy Powerball tickets at the Nevada to California border line today is UNREAL!!!! ???? pic.twitter.com/prehiIeM3i
— Dan Fleyshman (@DanFleyshman) January 13, 2016
- Hong Kong Dollar De-Pegging Risk Spikes As Yuan Slides, China Stocks Drop To 2-Year Lows
Update:
- SHANGHAI COMPOSITE INDEX FALLS 20% BELOW DECEMBER HIGH
To 2-Year Lows…
Offshore Yuan is being dumped again…
And The Hong Kong Dollar is under sever pressure within its peg band…
As De-Pegging risk expectations ramp up…
As we detailked earlier,following last night's notable weakness in Chinese stocks (now down 15-25% year-to-date) and today's plunge in US markets, Offshore Yuan has begun to tumble lower once again ahead of today's Yuan fix. Having slapped short Yuan speculators with a dire liquidity withdrawal, it appears traders are seeing through the "over-invoicing" bullshit of last night's trade data and outflows appear to have restarted. Equities across AsiaPac are tumbling despite PBOC injecting a massive CNY160bn of liquidity (and modestly strengthening the Yuan fix), as safe-haven flows push 10Y China bonds to 2.70% – a record low.
Chinese bonds just hit a record low yield…
- *CHINA 10-YEAR BOND YIELD DROPS 3 BPS TO RECORD 2.70%
Offshore Yuan is selling off again…
And Chinese equities are a bloodbath in 2016…
And tonight's open is not helping…
- *MSCI ASIA PACIFIC INDEX EXTENDS LOSS TO 2.3%
- *FTSE CHINA A50 JANUARY FUTURES FALL 1.7% IN SINGAPORE
- *SHANGHAI COMPOSITE FALLS BELOW AUGUST CLOSING LOW
But China "flu" appears to be spreading as carry trade unwinds spread to JPY…
Japanese stocks are plunging – NKY down 700 points from its US session highs…
To its weakest since Oct 2014…
Get back to work Mr. Kuroda!!!
Charts: Bloomberg
- How China Almost Ran Out Of Physical Dollars
On Tuesday, we weren’t surprised to learn that some banks in Shanghai and Beijing were apparently running short of physical dollar bills.
According to Ming Pao, Shanghai residents were lined up at local banks in a frantic effort to sell RMB for USD amid China’s ongoing yuan deval.
“Some banks in China’s Beijing, Shanghai and Shenzhen ran short of dollar bills for cash withdrawal amid increasing demand for the currency,” 21st Century Business Herald added, citing a reporter’s investigation which showed that “BOC, CCB, and China Merchants Bank in the listed cities are requiring an appointment at least 2 days in advance for >$5,000 purchases.” The appointment “could take as long as 1 week at some branches,” the paper said.
Why the panic? Because, in the simplest possible terms, no one has any idea what Beijing’s target is for the yuan.
In fact, no one even knows if the PBoC has a target at all or if China is simply flying by the seat of its pants managing the glidepath on an ad hoc, daily basis depending on how wide the onshore/offshore spread is (a proxy for the pressure on the currency).
One thing seems certain though: a much bigger “adjustment” will be necessary if China hopes to stabilize its economy by propping up exports. As Deutsche Bank noted last week, if global currencies continue to slide against the dollar, the yuan will need to fall if China hopes to keep its new trade-weighted RMB index from rising.
As long as the deval continues in a kind of fits and starts fashion, the capital flight will continue. That is, the only way to stabilize the situation is to allow the market to decide where the yuan should trade once and for all, a painful option in the short run, but a move that would keep the country’s capital account from dying a slow death by a thousand paper cuts. As Morgan Stanley puts it, “the capital accoount [currently] dominates the current account.”Now, as the turmoil continues (temporarily “better” trade data notwithstanding), WSJ is out with an account of how China is rapidly running out of physical dollars. “At major lender Industrial & Commercial Bank of China Ltd., one banker said the number of people wanting to change yuan for dollars has increased significantly during the past three weeks—a period during which the Chinese currency has declined about 2%,” WSJ begins. “During the weekend, ICBC received an urgent notification from China’s central bank warning of a dollar shortage, he said.”
ICBC customers are now subject to the same kind of waiting period described earlier this week by 21st Century Business Herald. The bank is now requiring a four day advance notice on FX exchanges presumably in an effort to manage the flows and ensure the cash is available.
Chinese are only allowed to exchange $50,000 per year (although between the various “Mr. Chens” and end-arounds like the UnionPay ruse there are plenty of ways to circumvent the captial controls) and WSJ suggests the selling pressure may be particularly acute now because everyone is starting with a clean slate for 2016. “Since China’s strict capital controls limit Chinese consumers to purchasing $50,000 worth of U.S. dollars each calendar year, January is also when they can start buying again with a fresh quota,” The Journal continues, before quoting Harry Hou “who works in the financial industry in Shanghai, [where] he, his wife and parents bought their limit of $200,000 last year, and started buying dollars again through China Merchants Bank’s online service as soon as the New Year kicked in.”
“This year’s biggest market risk is not going to be [stocks] but the yuan. The government has let the yuan fall in the past, allowing it to weaken to 8 yuan from 5 yuan against the dollar in the 1990s,” Hou said.
And while Chinese authorities are doing their best to control the flow by cracking down on quota abusers and asking banks to make lists of those suspected of skirting the rules, the only way to stop the bleeding is to convince the market that the deval has nearly run its course. That won’t be easy, especially with the onshore/offshore spread blowing out, persistently lower nightly fixings, and a trade-weighted RMB that’s still substantially elevated from a historical perspective.
In fact, Chinese are so convinced that there’s more downside to come that exporters are executing a daily arb. “James Mao, who runs a Shanghai-based company that exports biochemical materials from China to the U.S., says he is asking Chinese suppliers to wait for a few days to get paid, since he thinks he can get more yuan for those dollars later,” The Journal explains. “Exporters are required to sell the foreign currency they obtain from trade to the central bank, but there are no rules on when the transaction needs to be done. So far this month, Mr. Mao says he pocketed an extra $2,000 by waiting longer to convert his dollars to yuan.”
Remember China, if the banks run out of dollars or if you find yourself having to wait a week for your greenbacks, there’s always Bitcoin.
And there’s always Chen.
- If You Don't Agree With Obama You Are "Peddling Fiction"
Submitted by Simon Black via SovereignMan.com,
If you’re not watching it purely for the entertainment value, sitting through a State of the Union speech ranks somewhere between a colonoscopy and a root canal.
Every year I opt for the former (entertainment value, not colonoscopy).
But because I live overseas, one of the added entertainment benefits is that I’m surrounded by foreigners who are seeing this highly ritualistic propaganda for the first time.
The absurdity starts almost immediately.
The Sergeant-at-Arms introduces the President of the United States, and he receives a massive, five minute standing ovation as he walks across the water to the podium.
The applause finally dies down briefly, until, immediately after, the Speaker of the House formally introduces the President. And then the applause begins anew.
Try explaining that to a foreigner who’s never seen it before.
Foreigner: “Why is everyone clapping again for the President as if they weren’t just clapping for him 30 seconds ago?”
Me: “Because that’s just the way they do it.”
Foreigner: “But why?”
Me: “… ummm… because they’re all trained monkeys?”
But it is at this point that the real propaganda begins, where the President of the United States tells his fellow Americans that they are prosperous and free.
He cited, for example, the 14 million jobs created since he took office.
Of course he failed to mention the more than $8 trillion in debt (77% increase) that has been accumulated since he was inaugurated seven years ago.
If the President truly wants to take credit as the job creator-in-chief, the basic math works out to be nearly $600,000 in government debt for every single job created.
Zerohedge showed yesterday, in fact, that while debt in the US has increased 77% over the last seven years, GDP has only increased by 13%.
Now, you’d think that for each additional dollar the US government was spending and indebting future generations, there would be at least $1 in GDP growth.
Ideally you’d get more than $1 in GDP growth. Duh. Businesses have to do this every single day.
If I borrow $10 million to buy and develop agricultural farmland, obviously the net effect once I’m finished should result in a property that’s worth MORE than $10 million.
But that’s not how it works when governments spend money. It took them $3.71 of debt to buy just $1 of GDP growth.
Yes, the overall result may show that the economy is technically bigger than it was in 2009.
But this ratio is completely screwed up, and it is not indicative of “the strongest, most durable economy in the world.”
In the meantime, there have never been more pages of laws, rules, and regulations ever in the history of the United States than there are today, January 13, 2016.
Just this morning, in fact, the federal government published another 369 pages of regulations. Tomorrow there will be even more.
Should you find yourself out of compliance with any of them, the government can summarily deprive you of your freedom, your property, and even your family.
And it can do so administratively, without a fair and speedy trial in front of an impartial judge and a jury of your peers.
This is not what freedom and prosperity are all about.
President Obama is undeniably upbeat about America. And he’s right, there are a lot of amazing people doing great things in the US.
The United States is a wonderful country. It’s clean. Modern. Reasonably safe. Standard of living is very high.
But decades of insane regulation, government debt, and astonishingly destructive monetary policy have resulted in a society where it is now easier to consume than produce.
Prosperity is not complicated. People figured out thousands of years ago that if you wanted to do well, you had to produce more than you consumed.
But the American system is the exact opposite, favoring those who recklessly borrow and spend, rather than those who work hard and responsibly save.
The President of the United States boldly accused everyone who doesn’t share his view as just making things up.
In his words, “Anyone claiming that America’s economy is in decline is peddling fiction.”
This is an extraordinary (and delusional) statement.
The government’s own numbers show that they are completely insolvent, to the tune of nearly $18 trillion.
The annual reports for the Social Security trust funds show that they are rapidly running out of money.
The Federal Reserve’s own balance sheet shows that it is precariously undercapitalized, with net capital less than 1% of total assets.
The Census Bureau’s data shows that the earnings for middle class Americans are stagnating.
The Labor Department’s numbers show that the number of Americans who have dropped out of the work force hasn’t been at this level since the Carter administration.
USDA figures show that the number of food stamp recipients is near an all-time high, simultaneously when the number of homeless children in America is at a record high.
And all of this, at a time when trust in government is near an all-time low.
These are all facts, not fiction.
The only fiction is pretending that this story has a happy ending.
- Last Bubble Standing
EM debt bubble… emaciated, FX Carry… crucified, Crude…crushed, High yield bonds… burst, Chinese equities… blown, Trannies… trounced, Small Caps… slammed, Biotechs… busted, and FANGs finally FUBAR! But there is one big (very big) bubble left in the world that no one is talking about, and a rather large liquidity-busting pin beckons…
In May 2015 we first explained exactly why China was blowing its equity market bubble. Simply put, with more "equity," companies were better able to refinance/roll (note, no interest in debt reduction or deleveraging) their record-breaking mountain of debt and avoid the systemic collapse that is utterly imminent for just a few more months/years.
Now that the equity market bubble has burst, Chinese authorities have chased investors into another bubble.
In October 2015, we warned of the relative risk building in the Chinese corporate bond market.
As the rout in Chinese stocks this year erased $5 trillion of value, investors fled for safety in the nation’s red-hot corporate bond market. They may have just moved from one bubble to another.
Into Chinese corporate bonds…
As we detailed just two months ago, this historic bond bubble is paradoxical for the simple reason that China's credit fundamentals have never been worse, and as we further showed, as a result of the ongoing collapse in commodity prices (which today's Chinese rate and RRR-cut will have absolutely no impact on), more than half of commodity companies can't generate the cash required to even pay their interest, a number which drops to "only" a quarter when expanded to all industries.
"The equity rout merely reflects worries about China’s economy, while a bond market crash would mean the worries have become a reality as corporate debts go unpaid," said Xia Le, the chief economist for Asia at Banco Bilbao. "A Chinese credit collapse would also likely spark a more significant selloff in emerging-market assets."
"Global investors are looking for signs of a collapse in China, which itself could increase the chances of a crash… This game can’t go on forever."
They will find it soon, because while China may have managed to once again kick the can on its most recent default when state-owned SinoSteel failed to pay due principal and interest last month only to get a quasi-government bailout, every incremental bail out merely forces even more cash misallocation and even more foolish "investments" into this high risk asset class as investors ignore any concerns about fundamentals, assuming instead that the government will always bail them out.
Worse still, it is not just the most creditworthy of Chinese corporate bonds that are at record low yields. As the following shocking decoupling shows, even BBB credits are in an extreme bubble – entirely separate from the reality of their underlying business risk (as indicated by the equity market and equity vol)…
The problem with that is that as BofA's David Cui notes today, China's bond market is the epitome of a "potential source of financial instability."
Here is Cui:
Our analysis shows that:
- the bond market is clearly not pricing default risk properly;
- the bond market has taken a few SME bond defaults in stride and seems to be counting on bail-outs of the few SOE bonds that are reportedly facing default risk; and
- leverage in the bond market is rapidly building up.
But most importantly, Bank of America has now given a time frame in which China's bond market will blow up, resulting in far more dire consequences that the equity bubble bursting this summer.
On the current trajectory, we doubt the market can stay stable beyond a few quarters, especially if some SOE and/or LGFV bonds indeed default.
Finally, to answer the question on everyone's mind – here is the full list of most likely upcoming Chinese debt default cases. When the bubble bursts, these names will be the first to blow up.
And now tonight we get this…
- *CHINA DEFAULTS LIKELY TO CONTINUE TO BECOME MORE COMMON: FITCH
Charts: Bloomberg
- Wednesday Humor: "This Is Why Obama Is Bullish On The Economy"
- Minimum Wage Misunderstandings: Incompetence Or Dishonesty
Submitted by Walter E Williams via The Burning Platform blog,
Michael Hiltzik, a columnist and Los Angeles Times reporter, wrote an article titled “Does a minimum wage raise hurt workers? Economists say: We don’t know.” Uncertain was his conclusion from a poll conducted by the Initiative on Global Markets, at the University of Chicago’s Booth School of Business, of 42 nationally ranked economists on the question of whether raising the federal minimum wage to $15 over the next five years would reduce employment opportunities for low-wage workers.
The Senate Budget Committee’s blog says, “Top Economists Are Backing Sen. Bernie Sanders on Establishing a $15 an Hour Minimum Wage.” It lists the names of 210 economists who call for increasing the federal minimum wage. The petition starts off, “We, the undersigned professional economists, favor an increase in the federal minimum wage to $15 an hour as of 2020.” The petition ends with this: “In short, raising the federal minimum to $15 an hour by 2020 will be an effective means of improving living standards for low-wage workers and their families and will help stabilize the economy. The costs to other groups in society will be modest and readily absorbed.”
The people who are harmed by an increase in the minimum wage are low-skilled workers.
Try this question to economists who argue against the unemployment effect of raising the minimum wage: Is it likely that an employer would find it in his interests to pay a worker $15 an hour when that worker has skills that enable him to produce only $5 worth of value an hour to the employer’s output? Unlike my fellow economists who might argue to the contrary, I would say that most employers would view hiring such a worker as a losing economic proposition, but they might hire him at $5 an hour. Thus, one effect of the minimum wage law is that of discrimination against the employment of low-skilled workers.
In our society, the least skilled people are youths, who lack the skills, maturity and experience of adults.
Black youths not only share these handicaps but have attended grossly inferior schools and live in unstable household environments. That means higher minimum wages will have the greatest unemployment effect on youths, particularly black youths.
A minimum wage not only discriminates against low-skilled workers but also is one of the most effective tools in the arsenal of racists.
Our nation’s first minimum wage came in the form of the Davis-Bacon Act of 1931, which sets minimum wages on federally financed or assisted construction projects. During the legislative debates, racist intents were obvious. Rep. John Cochran, D-Mo., said he had “received numerous complaints in recent months about Southern contractors employing low-paid colored mechanics getting work and bringing the employees from the South.” Rep. Miles Allgood, D-Ala., complained: “That contractor has cheap colored labor that he transports, and he puts them in cabins, and it is labor of that sort that is in competition with white labor throughout the country.” Rep. William Upshaw, D-Ga., complained of the “superabundance or large aggregation of Negro labor.”
During South Africa’s apartheid era, the secretary of its avowedly racist Building Workers’ Union, Gert Beetge, said, “There is no job reservation left in the building industry, and in the circumstances, I support the rate for the job (minimum wage) as the second-best way of protecting our white artisans.” The South African Economic and Wage Commission of 1925 reported that “while definite exclusion of the Natives from the more remunerative fields of employment by law has not been urged upon us, the same result would follow a certain use of the powers of the Wage Board under the Wage Act of 1925, or of other wage-fixing legislation. The method would be to fix a minimum rate for an occupation or craft so high that no Native would be likely to be employed.”
It is incompetence or dishonesty for my fellow economists to deny these two effects of minimum wages: discrimination against employment of low-skilled labor and the lowering of the cost of racial discrimination.
- Q4 Will Be The Worst U.S. Earnings Season Since The Third Quarter Of 2009
Couple of things: first of all, any discussion whether the US market is in a profit (or revenue) recession must stop: the US entered a profit recession in Q3 when it posted two consecutive quarters of earnings declines. This was one quarter after the top-line of the S&P dropped for two consecutive quarters, and as of this moment the US is poised to have 4 consecutive quarters with declining revenues as of the end of 2015.
Furthermore, as we showed on September 21, when Q4 was still expected to be a far stronger quarter than it ended up being, in the very best case, the US would go for 7 whole quarters without absolute earnings growth (and even longer without top-line growth).
Then, as always happens, optimism about the current quarter was crushed as we entered the current quarter, and whereas on September 30, 2015, Q4 earnings growth was supposed to be just a fraction negative, or -0.6%, as we have crossed the quarter, the full abyss has revealed itself and according to the latest Factset consensus data as of January 8, the current Q4 EPS drop is now expected to be a whopping -5%. And just to shut up the “it’s all energy” crowd, of the 10 industries in the S&P, only 4 are now expected to post earnings growth and even their growth is rapidly sliding and could well go negative over the next few weeks.
It gets even worse. According to Bloomberg, on a share-weighted basis, S&P 500 profits are expected to have dropped by 7.2% in 4Q, while revenues are expected to fall by 3.1% This would represent the worst U.S. earnings season since 3Q 2009, and a third straight quarter of negative profit growth. It’s no longer simply a recession: as noted above, the Q4 EPS drop follows declines of 3.1% in Q3 and 1.7% in Q2. it is… whatever comes next.
As Bloomberg adds, the main driving forces behind drop in U.S. earnings are the rise in the dollar index (thanks Fed) and the drop in average WTI oil prices. However, since more than half of all industries are about to see an EPS decline, one can’t blame either one or the other.
So while we know what to expect from Q4, a better question may be what is coming next, and according to the penguin brigade, this time will be different, and the hockey stick which was expected originally to take place in Q4 2015 and then Q1 2016 has been pushed back to Q4 2016, when by some miracle, EPS is now expected to grow by just about 15%.
Good luck.
- Correlation Or Causation: How The Fed Helped Create The Global Oil Glut (In 1 Simple Chart)
Correlation or Causation?
h/t DoubleLine
Easy money by The Fed expanding their balance sheet ENABLED tight oil to be produced 'economically'…
But the signals this sent to the market became self-fulfilling (thanks to an endless Fed put) further creating record US crude production (as the oil 'gold rush' ensued), forcing a real 'deflating' world to be 'glutted' with ever-increasing output of mal-investment-driven 'expensive' oil…
of course until that facade of 'boom', busted and crushed the price of the over-produced by 75% (back to 'reality')
Can you spot the moment The Fed jumped the shark?
So the question is – If The Fed enables mal-investment booms by mandate (or ignorance), will they ever learn from the inevitable busts?
- Does The U.S. Have A Middle East Strategy Going Forward?
Submitted by Gregory R. Copley via OilPrice.com,
Senior-level sources in numerous Middle Eastern governments have privately expressed bewilderment at recent and current U.S. government strategies and policies toward the region.
But a closer examination of U.S. policies, now almost entirely dictated by the Obama White House, shows no cohesive national goals or policies exist, but rather an ad hoc set of actions and reactions, which are largely dictated either by ideological positions, ignorance, whim, or perceived expedience.
This is unique in U.S. history.
In short, the consistent pattern of policies developed over the past century has now been broken up, apart from some of the physical consistencies of legacy military deployments and basing, and by some trade and weapons program commitments. Even there, military deployments have contracted substantially in the past few years, and new U.S. defense systems sales to the region have been lost to suppliers from France, Russia, the People’s Republic of China (PRC), Germany, Pakistan, and others
In the 18 months until January 2016, the U.S. missed possibly $12- to $15-billion in sales of defense and energy systems in the Middle East, and a range of major new defense acquisitions from non-U.S. suppliers are under consideration by Middle Eastern states. At the same time, some of the U.S.’ major traditional allies in the region — Israel, Egypt, and Saudi Arabia, in particular — have felt compelled, for their own survival, to turn their back on Washington because of a perception of a divergence in values and goals.
Most U.S. policy officials — especially in Defense — insist that U.S. commitments and strategies in the region have not changed, but the actions and policies dictated directly by the Barack Obama White House, and mirrored at Secretary of State level, have proven antithetical to most states in the greater Middle East, with the exception of Turkey and Qatar. Some regional states, such as Oman, are concerned; others, such as Ethiopia and Djibouti, are now left feeling strategically abandoned.
The sudden withdrawal of U.S. forces from their deployment at the Ethiopian air base at Arba Minch — from where Reaper UAV sorties were conducted against al-Shabaab in Somalia — was done in September 2015 without forewarning to the Ethiopian Government in Addis Ababa, and kept secret until an Ethiopian website disclosed it in early January 2016. The U.S. had signed a series of multi-year supply agreements with Ethiopian companies to support the base in the weeks leading up to the withdrawal, a firm indication that the decision to vacate Arba Minch was sudden and hastily planned.
The Arba Minch withdrawal coincided with growing U.S. hostility toward the Government of Djibouti — which is strategically integral to Ethiopia’s fortunes — and the very pointed siding of U.S. Secretary of State John Kerry with Saudi Arabia and the United Arab Emirates against Djibouti. This resulted in Saudi and UAE strong military commitments to Eritrea (to compensate for the loss of their Djibouti basing in the war in Yemen), another blow to Ethiopian security. But it also coincided with the visit by U.S. President Barack Obama to Addis Ababa to talk at the African Union, where he was accorded a very mixed reception based on his insistence on African states accepting his — Obama’s — stance on gay marriage, among other things.
Significantly, although President Obama’s team was warned against such provocations in advance of his Addis and Nairobi visits, most Obama Administration officials do not understand what they have done to offend some of the nations in the region. Even Kerry’s support for Saudi Arabia and the UAE in the rift with Djibouti did not win their support for Washington, as both states feared that the U.S. now supported Iran rather than the lower Persian Gulf states. The Iranian Government, however, has been under no such illusions, even among those who supported the G5+1 treaty with Iran to end some of Iranian nuclear weapons programs in exchange for lifting economic sanctions. They, too, see U.S. support for the Saudi coalition against them in Yemen.
The net result has been a bonanza for the PRC, and the deal by Djibouti to welcome a PRC naval base in the country was confirmed and cemented when Djibouti President Ismail Omar Guelleh met in South Africa with China’s President Xi Jinping in early December 2015. This was a strategically successful gathering of African leaders with China’s leader within weeks of the Indian summit in New Delhi with African leaders.
The U.S. has done nothing of consequence to rebuild its position, which means that the strategic framework in the Middle East and Africa will, within a decade, be profoundly different from the beginning of the 21st Century.
- Tanker Rates Tumble As Last Pillar Of Strength In Oil Market Crashes
If there was one silver-lining in the oil complex, it was the demand for VLCCs (as huge floating storage facilities or as China scooped up 'cheap' oil to refill their reserves) which drove tanker rates to record highs. Now, as Bloomberg notes so eloquently, it appears the party is over! Daily rates for benchmark Saudi Arabia-Japan VLCC cargoes have crashed 53% year-to-date to $50,955 (as it appears China's record crude imports have ceased).
In fact the rate crashed 12% today for the 12th straight daily decline from over $100,000 just a month ago…
China imported a record amount of crude last year as oil’s lowest annual average price in more than a decade spurred stockpiling and boosted demand from independent refiners.
China's crude imports last month was equivalent to 7.85 million barrels a day, 6 percent higher than the previous record of 7.4 million in April, Bloomberg calculations show.
China has exploited a plunge in crude prices by easing rules to allow private refiners, known as teapots, to import crude and by boosting shipments to fill emergency stockpiles. The nation’s overseas purchases may rise to 370 million metric tons this year, surpassing estimated U.S. imports of about 363 million tons, according to Li Li, a research director with ICIS China, an industry researcher.
But given the crash in tanker rates – and implicitly demand – that "boom" appears to be over.
Shipbroker analysts blame fewer January cargoes and oil companies using their own vessels for shipment as the main reasons for the dramatic decline. As Bloomberg adds,
Oil tanker earnings boomed thanks to the very thing that drove down crude prices: an abundance of supply that made ship-fuel cheaper and shipments plentiful. This month, shipbrokers report a slump in spot cargoes from the Middle East.
While they say it would be premature to suggest that has implications for the region’s output, the plunge in rates shows just how sensitive owners are to monthly fluctuations in shipments.
The good news after all this carnage is that, even before today's plunge, collapsing tanker rates were already pushing economics for floating storage (the carry trade) closer to be proditable.
- In Latest Embarrassment For Obama, Iran Releases Footage Of Arrest, Apology Of 10 U.S. Sailors
With just hours to go before Obama’s last State of the Union address, the US president suffered his latest foreign policy fiasco when around noon local time, Iran arrested 10 US sailors in a boat that has allegedly entered deep into Iranian territorial waters.
Needless to say, there was no mention of this in Obama’s address and the scandal was quietly swept under the rug when the 9 young men and 1 woman were released earlier today, and all questions just why the soldiers were released only well after the SOTU’s conclusion (were they a hostage bargaining chip in case Obama said something out untoward last night regarding Iran) were soundly ignored.
However, while there may have been some doubt as to Iran’s intentions yesterday, all doubt was eliminated moments ago when Iran’s state broadcaster just released photos not just of the 10 captured soldiers, which were shown earlier, but of their arrest as well as the seizure of the boat and their weapons.
Here is the just released TV footage, courtesy of Sobhan Hassanvand:
Fars news shows the video of capturing the US navy sailors pic.twitter.com/7kbsUe8kDR
— Zaid Benjamin (@zaidbenjamin) January 13, 2016
Here is a video of the US Commander apologizing (via Fox):
Video from Iranian state television shows a US Navy sailor apologizing while being detained. https://t.co/Ymr632ThF1
https://t.co/IlvSh46NLn— Fox News (@FoxNews) January 13, 2016
And here are excerpted photos, showing US sailors being treated as common Somali pirates:
Finally, putting Iran’s aggression in context:
- Canadians Panic As Food Prices Soar On Collapsing Currency
It was just yesterday when we documented the continuing slide in the loonie, which is suffering mightily in the face of oil’s inexorable decline.
As regular readers are no doubt acutely aware, Canada is struggling through a dramatic economic adjustment, especially in Alberta, the heart of the country’s oil patch. Amid the ongoing crude carnage the province has seen soaring property crime, rising food bank usage and, sadly, elevated suicide rates, as Albertans struggle to comprehend how things up north could have gone south (so to speak) so quickly.
The plunging loonie “can only serve to worsen the death of the ‘Canadian Dream'” we said on Tuesday.
As it turns out, we were right.
The currency’s decline is having a pronounced effect on Canadians’ grocery bills.
As Bloomberg reminds us, Canada imports around 80% of its fresh fruits and vegetables. When the loonie slides, prices for those goods soar. “With lower-income households tending to spend a larger portion of income on food, this side effect of a soft currency brings them the most acute stress” Bloomberg continues.
Of course with the layoffs piling up, you can expect more households to fall into the “lower-income” category where they will have to fight to afford things like $3 cucumbers, $8 cauliflower, and $15 Frosted Flakes.
As Bloomberg notes, James Price, director of Capital Markets Products at Richardson GMP, recently joked during an interview on BloombergTV Canada that “we’re going to be paying a buck a banana pretty soon.”
Have a look at the following tweets which underscore just how bad it is in Canada’s grocery aisles. And no, its not just Nunavut: it from coast to coast:
Three bucks. For a cucumber. pic.twitter.com/xGkygxkxqB
— Steve Ladurantaye (@sladurantaye) January 12, 2016
If the CAD $ gets any weaker we might be able to buy groceries with shiny rocks #Canada
— Josh Landine (@joshlandine) January 12, 2016
@sladurantaye Heh. Had a similar reaction when I saw the price of cauliflower. Welcome to the future… pic.twitter.com/fxloxyePY3
— Craig Saila (@saila) January 12, 2016
The cost of Tide detergent in Nunavut: pic.twitter.com/2t2xA1EmYk
— themsteri (@teririch) December 31, 2015
And while some Canadians might think this is a regional phenomenon …
… folks in the northern parts of the Great White North do have the most cause to cry foul:
No “Jack Nasty” it’s not The Great Depression, but as we highlighted three weeks ago, it is Canada’s depression and it’s likely to get worse before it gets better. “Last year, fruits and veggies jumped in price between 9.1 and 10.1 per cent, according to an annual report by the Food Institute at the University of Guelph,” CBC said on Tuesday. “The study predicts these foods will continue to increase above inflation this year, by up to 4.5 per cent for some items.”
If you thought we were being hyperbolic when we suggested that if oil prices don’t rise soon, Canadians may well eat themselves to death, consider the following from Diana Bronson, the executive director of Food Secure Canada:
“Lower- and middle-class people — many who can’t find a job that will pay them enough to ensure that they can afford a healthy diet for their families” — also feel the pinch of rising food prices”
“The wrong kind of food is cheap, and the right kind of food is still expensive.”
In other words, some now fear that the hardest hit parts of the country may experience a spike in obesity rates as Canadians resort to cheap, unhealthy foods. As we put it, “in Alberta it’s ‘feast or famine’ in the most literal sense of the phrase as those who can still afford to buy food will drown their sorrows in cheap lunch meat and off-brand ice cream while the most hard hit members of society are forced to tap increasingly overwhelmed food banks.”
And the rub is that there’s really nothing anyone can do about it.
Were the Bank of Canada to adopt pro-cyclical measures to shore up the loonie, they would risk choking off economic growth just as the crude downturn takes a giant bite out of the economy – no food pun intended.
- Markets In Freefall: Stocks Extend Worst Ever Start To Year
Today's business media summarized…
Today's actual market summarized…
Let's start with this – The market has now reduced March rate-hike odds back to pre-December rate-hike levels (at just 35%)…
Two words – Policy… Error…
This remains the worst start to a year… ever…
Across the major US equity markets, it's a bloodbath…
*RUSSELL 2000 CAPS 22% DROP FROM JUNE RECORD, ENTERS BEAR MARKET
With the Nasdaq about to be the lasty major index to give up its post-QE3 gains…
Year to Date – it's just as ugly…
And since The Fed hiked rates…
VIX term structure inverted but we are a long way from an August-like panic-bottom…
There is at least some rationality resumiong as weak balance sheet stocks underperform strong balance sheet firms…
With selling out of the gate and only a small bounce in the last hour, equity markets carnaged…
FANGs entered a correction…
And FANTAsy stocks were smashed today…
Lots of head-scratching at how this is possible… except for anyone who pays attention to credit markets…
As HYG plunges to its lowest close since July 2009… Today was worst day in 4 weeks
US Energy credit risk is soaring back to near 2008 crisis highs…
h/t @JavierBlas2
While High yield bonds were crashing, Treasuries were aggressively bid (despite the Inbev issuance), on the verge of flash-crashing a few times after a stronmg 10Y auction…
The USDollar Index ended the day unchanged as early strength was sold – but it remains up on the week… CAD was smashed to new 12 yeasr lows
Gold ansd Silver rallied as Crude and Copper crumbled…
As stocks plunged at the US open so PMs ripped…
As if by magic, WTI's NYMEX close was adjusted very slightly higher to enable a tiny green print… but the trend was clear…
Charts: Bloomberg
Bonus Chart: Some food for thought…
- "Very Worrisome Signal For Fed Credibility" – Former Fed President Trolls Federal Reserve
It’s one thing for a fringe website to mock the Fed (on a daily basis, for the past 7 years), with articles such as this one we posted just before noon today, showing that inflation expectations have once again imploded, less than a month after the Fed’s rate hike was supposed to signal confidence in the economy and a renormalization in inflation:
Since The Fed hiked rates in December, the market’s inflation expectations have collapsed in yet another clear indication of “policy error.” 5Y5Y Forward inflation swaps have crashed below 2.00% for only the 3rd time in history (Lehman 2008 and September’s Fed Fold were the other two) as despite central banker promises of transitory low-flation, the money is being bet against them as the regime-shift from full-faith to no-faith in Fed support continues.
However, when a former Fed president, one who was employed as recently as two weeks ago by the Minneapolis Fed, Narayana Kocherlakota, best known for being the biggest hawk to dove conversion in Fed history, and also being the one person to dare put a negative dot on the Fed’s ever amusing dot plot, suggesting it is time for negative rates does exactly the same, you know that the Fed’s credibility has already run out.
From Kocherlakota: “Very worrisome signal for Fed credibility as 5 yr 5 yr forward breakevens plumb new lows …”
Very worrisome signal for Fed credibility as 5 yr 5 yr forward breakevens plumb new lows … pic.twitter.com/OxavyW2cTD
— NRKocherlakota (@kocherlakota009) January 13, 2016
Of course, the far more worrisome signal for Fed credibility is not that inflation forwards are plunging, but that one of the Fed’s faithful has now taken to a public forum like Twitter to troll his former co-workers.
All that it would take now is for Yellen to formally admit the Fed’s credibility is gone and to cut rates first back to zero, and then negative, with a solid dose of QE on top, admitting it was always only about the markets.
- What Geniuses Come To Believe
Submitted by Paul Rosenberg via FreemansPerspective.com,
It recently struck me that the people we think of as “geniuses” tend to arrive, over time, at surprisingly similar sets of conclusions.
It further struck me that a simple list of such thoughts might be of value to my readers.
So, here is a list pulled from my quotes file and presented without commentary. Enjoy:
Albert Einstein
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Unthinking respect for authority is the greatest enemy of truth.
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Nothing will end war unless the people themselves refuse to go to war.
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Never do anything against conscience, even if the state demands it.
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The world is in greater peril from those who tolerate or encourage evil than from those who actually commit it.
-
Small is the number of them that see with their own eyes and feel with their own hearts.
Rod Serling
- The ultimate obscenity is not caring, not doing something about what you feel, not feeling.
Arthur Schopenhauer
- We forfeit three-fourths of ourselves in order to be like other people.
Thomas Jefferson
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I have sworn upon the altar of god eternal hostility against every form of tyranny over the mind of man.
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It is error alone which needs the support of government. Truth can stand by itself.
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I would rather be exposed to the inconveniences attending too much liberty than those attending too small a degree of it.
Allan Bloom
- The most successful tyranny is not the one that uses force to assure uniformity but the one that removes the awareness of other possibilities, that makes it seem inconceivable that other ways are viable, that removes the sense that there is an outside.
John Stuart Mill
- The only freedom which deserves the name is that of pursuing our own good in our way, so long as we do not attempt to deprive others of theirs or impede their efforts to obtain it.
Leo Tolstoy
- The truth is that the State is a conspiracy designed not only to exploit, but above all to corrupt its citizens… Henceforth, I shall never serve any government anywhere.
Will Durant
- Above all, the ruling minority sought more and more to transform its forcible mastery into a body of law which, while consolidating that mastery, would afford a welcome security and order to the people, and would recognize the rights of the “subject” sufficiently to win his acceptance of the law and his adherence to the state.
George Bernard Shaw
- All government is authoritarian; and the more democratic a government is the more authoritative it is; for with the people behind it, it can push authority further than any Tsar or foreign despot dare do.
Aldous Huxley
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So long as men worship the Caesars and Napoleons, Caesars and Napoleons will duly rise and make them miserable.
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Liberty, as we all know, cannot flourish in a country that is permanently on a war footing, or even a near war footing. Permanent crisis justifies permanent control of everybody and everything by the agencies of central government.
Richard Feynman
- Theoretically, planning may be good. But nobody has ever figured out the cause of government stupidity – and until they do (and find the cure), all ideal plans will fall into quicksand.
Buckminster Fuller
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Dear reader, traditional human power structures and their reign of darkness are about to be rendered obsolete.
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If you take all the machinery in the world and dump it in the ocean, within months more than half of all humanity will die and within another six months they’d almost all be gone; if you took all the politicians in the world, put them in a rocket, and sent them to the moon, everyone would get along fine.
-
We are powerfully imprisoned in these Dark Ages simply by the terms in which we have been conditioned to think.
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Either you’re going to go along with your mind and the truth, or you’re going to yield to fear and custom and conditioned reflexes.
Erich Fromm
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The history of mankind up to the present time is primarily the history of idol worship, from primitive idols of clay and wood to the modern idols of the state, the leader, production and consumption – sanctified by the blessing of an idolized God.
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Obedience to God is also the negation of submission to man.
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[I]f one has no possibility of acting, one’s thinking kind of becomes empty and stupid.
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Is there really as much difference as we think between the Aztec human sacrifices to their gods and the modern human sacrifices in war to the idols of nationalism and the sovereign state?
Charlie Chaplin
- As for politics, I’m an anarchist. I hate governments and rules and fetters. Can’t stand caged animals. People must be free.
Carl Jung
- For in order to turn the individual into a function of the State, his dependence on anything beside the State must be taken from him.
Ray Bradbury
- We bombard people with sensation. That substitutes for thinking.
Abraham Maslow
- I can certainly say that descriptively healthy human beings do not like to be controlled. They prefer to feel free and to be free.
Simone Weil
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The real sin of idolatry is always committed on behalf of something similar to the State.
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Conscience is deceived by the social.
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Human history is simply the history of the servitude which makes men – oppressed and oppressors alike – the plaything of the instruments of domination they themselves have manufactured, and thus reduces living humanity to being the chattel of inanimate chattels.
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What a country calls its vital economic interests are not the things which enable its citizens to live, but the things which enable it to make war.
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- The Aftermath Of US Intervention: What The "Arab Spring" Looks Like 5 Years Later
If you needed a crash course in how not to conduct foreign policy, you need only take a cursory glance at Washington’s trials and travails in the Mid-East over the last decade.
On the way to documenting the the carnage unfolding in Libya’s oil crescent last week we said that the country, much like Syria, is a case study in why the West would be better off not intervening in the affairs of sovereign states on the way to bringing about regime change. “Toppling dictators” sounds good in principle, but at the end of the day, it’s nearly impossible to predict what will emerge from the power vacuums the US creates when Washington destabilizes governments.
Post-Baathist Iraq is rife with sectarian discord, a post-Assad Syria would likely be an even bloodier free-for-all than it already is, and post-Gaddafi Libya is a failed state with two governments each claiming legitimacy. These types of environments are exploitable by extremists eager to capitalize on the chaos by seizing resources and, ultimately, power.
It’s in that context that we present the following graphic from The Economist which vividly demonstrates the fact that the Arab Spring was but a false dawn and that five years on, we still have but one democracy among a sea of autocracies and failed states.
By the way, the one “democracy” success story in Tunisia is exceptionally tenuous as evidenced by November’s suicide attack in the capital.
- JPM's "Gandalf" Quant Is Back With A Startling Warning
Two days ago we reported that one half of JPM’s Croatian “Duo of Doom”, namely equity strategist Dubravko Lakos-Bujas, became every BTFDer’s worst enemy when he said that the time of BTFDing is over, and a regime change has arrived one in which rallies are to be sold. To wit:
Our view is that the risk-reward for equities has worsened materially. In contrast to the past 7 years, when we advocated using the dips as buying opportunities, we believe the regime has transitioned to one of selling any rally. Yes, stocks had a rough time most recently, and some of the tactical indicators, such as Bull-Bear at -16 which is at the bottom of its trading range, argue for a short-term respite. Clearly, equities are unlikely to keep falling in a straight line, with periodic rebounds likely. However, we believe that one should be using any bounces as selling opportunities.
We fear that the incoming Q4 reporting season won’t be able to provide much reassurance for stocks. As was the case for a while now, consensus expectations have been managed aggressively into the results. The hurdle rate for Q4 S&P500 EPS has fallen from +5%yoy a few months back to -4%yoy currently. If this were to materialise, it would be the weakest quarter for EPS delivery so far in the upcycle.
Today, the other half of the infamous Croatian duo…
… the legendary “Gandalf” (as dubbed first by Bloomberg) quant Marko Kolanovic, who needs no introduction on this website, and whose every prediction starting in late August turned out just as predicted…
… is out with a new note which will hardly make him any more popular with the permabullish crowd, asks whether “negative performance in 2015 and January, turmoil in China, and continuing decline in Oil prices make investors wonder if this could be the end of the nearly 7-year bull market.”
His short answer:
“The fact that market volatility is on the rise and the Fed is raising interest rates further increases the probability of a Bear Market. The current option-implied probability of a bear market (i.e. ~20% decline this year) is about 25%. While there is no way to predict a bear market, below we look at various scenarios, and estimate that the probability of a bear market may be nearly twice as large.“
So according to the man whose every market forecast has been so far impeccable, the probability of a bear market: or a 20% or more drop in the S&P500 – is roughly 50%.
Not good.
And what will make the permabulls even angrier is his proposed allocation to avoid the bear market:
In case an equity bear market materializes this year, investors should benefit from increasing allocation to cash or gold. Cash has zero correlation to all risky assets, while Gold has recently exhibited strong negative correlation to risky assets (e.g. -40% to equities).
* * *
This is what else he says:
from Systematic Strategy Flows, Oil Prices and the Risk of an Equity Bear Market
First, let’s look at relationship between Oil prices and S&P 500. Oil prices recently posted some of the fastest declines on record. Over extended periods of time, Oil and S&P 500 were positively correlated. Figure 4 shows the out/underperformance of Oil relative to the S&P 500 over the past 30 years (trailing 12M relative performance). One can see that that in each of the 10 episodes of large Oil-S&P 500 price divergences, the gap was always closed in a relatively short time period. Significant underperformance of Oil (e.g. >30%) in 8 out of 10 instances resulted in either a decline in the S&P 500 or large Oil rally. In 2 instances, namely shortly after the start of the Gulf Wars in 1991 and 2003, the decline in Oil was a result of overbought conditions immediately prior to these events. One of the largest swings in Oil-S&P 500 performance (comparable to the one over the past year) occurred during the Asia and Russia crisis of 1997/98. The current underperformance of Oil to the S&P 500 is not just one of the largest on the record, but is by far the longest one. Given that divergences of this size closed in 10 out of 10 historical instances, we believe a closing of this gap is very likely.
This can occur either by the S&P 500 falling (e.g. Oil is a predictor of a recession, as in 2008), or by Oil rising (e.g. a reduction of speculative positions, reduction of supply, geopolitical escalation). In any case, we believe that a long Oil and short S&P 500 trade is likely to deliver positive performance in 2016.
A sharp rise in Oil prices could also trigger ‘stagflation’ and lead to an equity bear market. While markets currently estimate the probability of this scenario at less than ~3% (option-implied probability of, for example, Oil doubling and the S&P 500 declining), we think the risk of that scenario is much higher. What could cause a sharp increase in Oil prices? For one, we note that current levels of OPEC production are likely not economically rational or sustainable. For example, to justify an increase in production at a time when prices have declined from $100 to $30, one would need to place triple the production level without further impacting the price.
As geopolitics is likely playing a large role in the Oil price decline, we think it can equally lead to a sharp price reversal. In addition to an agreed production cut, production disruptions are an increasing risk in our view. Recent increases of tension between Saudi Arabia and Iran add to that risk. Parties to a conflict that could independently lead to such disruption include: extremist elements from Saudi Arabia or abroad (e.g. for recent attempt see here), Yemen (for recent attempt see here), Iran, and others. Moreover, high marginal cost producers may drop offline, reducing supply. A doubling of Oil prices may not be a tail event after all (e.g. a significant increase in Oil prices would also be consistent with J.P. Morgan’s current Q4 forecast).
To further assess the likelihood of an equity bear market, we look at historical bull and bear S&P 500 cycles over the past 50 years. We have identified 19 such cycles that alternated in relatively regular periods of time. There were 10 bull markets, lasting on average 4.3 years and delivering ~90% average returns, and 9 bear markets lasting on average 1.1 years and resulting in an average decline of 33%. The current ~205% bull market started in 2009 and is now 6.5 years old. As such, it is one of the longest/largest bull markets. There was only one longer and larger cycle, namely from 1990 to 1998 (that coincidentally ended with the Asia/EM crisis and sharp decline in Oil prices).
The length and return of a bull market is closely related to the size and length of the bear market preceding it (and vice versa). This is shown in the figures below which relate the return during a bear market (horizontal axis) and length of subsequent bull market (Figure 5), and return of the subsequent bull market (Figure 6). In that regard, the current bull market is in-line given the size of the 2008/2009 bear market. In other words, if the bull market was to end now and we are entering a bear market – it would be in-line with historical trends. While this analysis is not proof of an impending bear market, it indicates to us that the chance of entering a bear market this year is probably higher than 25% (currently implied by option markets).
Finally, for the end of a bull market, one needs to have equity prices ahead of their fundamental valuations. While valuation of the overall market is not consistent with a stock market bubble, some pockets do show stretched valuation (e.g. the market capitalization of Internet/Software sectors as % of the S&P 500 is not far from tech bubble peaks).
Figure 7 shows the level of the S&P 500 as well as short-term interest rates (Fed funds). Between 1990 and 2010, the Fed was adjusting short-term rates largely in synch with the price performance of the S&P 500. Historically, the Fed increased rates during market rallies and reduced them during market selloffs, in pursuing its dual mandate of maintaining price stability and maximum employment. This trend broke in 2009. As the US equity market took off, the Fed kept rates at zero and added large monetary stimulus over the next 5 years. This coincided with one of the largest and longest bull markets in US history. During this bull market, stock and bond buybacks increased in pace, with the Fed buying ~15% of government bonds outstanding, and corporates buying back about ~10% of stock outstanding, which were a driver of the increased asset prices. A clear break of the trend between Fed Funds and the S&P 500 might imply that either the S&P 500 rallied too far given the weak growth and appropriate Fed stimulus, or that the Fed underestimated the strength of the economy, in which case the stimulus would have contributed to inflating a bubble. In any case, an increase of short-term rates could be a catalyst for a correction, or even the start of a bear market.
In case an equity bear market materializes this year, investors should benefit from increasing allocation to cash or gold. Cash has zero correlation to all risky assets, while Gold has recently exhibited strong negative correlation to risky assets (e.g. -40% to equities). While bonds have historically been an efficient portfolio hedge, we think that bonds are increasingly at risk of becoming positively correlated to equities (e.g. selling of EM reserves, systematic strategies de-levering, or interest rates increasing).
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