- Washington's Dismal Comedy Of Terrors – When In Doubt Bomb Syria
Submitted by Jeffrey St.Clair via Counterpunch.org,
Poor ISIS. Try as they might, the men in black still can’t out-terrorize their enemies or, more pointedly, even their patrons. For the past three years, decapitations have served as the money shots for ISIS’s theater of cruelty. Then on New Year’s Day the Saudis upstaged ISIS by audaciously chopping off the heads of 47 men, including a prominent Shia cleric.
This act of brazen butchery is made all the more horrific by virtue of the fact that the Saudi head-slicers recently landed a seat on the UN Human Rights Council, largely at the insistence of British Prime Minister David Cameron, who personally vouched for the petro-autocracy’s acute sensitivity to matters of civil liberties and the humane treatment of prisoners. Then again the drone-troika of Britain, France and the U.S. also enjoy seats on the council, so perhaps the Saudis have earned their slot after all.
With his peculiar fondness for porcine heads, Cameron is probably the Kingdom’s most un-kosher ally, but he is far from Saudi Arabia’s only political cheerleader. Showing a stunning lack of judgment, Comandante Bernie Sanders says his Syrian strategy relies on the Saudis taking the lead in the fight against ISIS. “They’ve got to get their hands dirty,” Sanders inveighed to Wolf Blitzer on CNN. “They’ve got to get their troops on the ground. They’ve got to win that war with our support. We cannot be leading the effort.”
Apparently Sanders skipped the briefing on how ISIS’s apocalyptic ideology has been fueled by fire-breathing Wahhabi preachers financed by the Saudi royal family. The red senator also seems ignorant of the fact that ISIS functions as shock troops for the House of Saud in its proxy war against Iran, now raging in Yemen and Iraq, as well as Syria. You’d think that Bernie would be getting better advice from his friends in Israeli intelligence.
Sanders’ policy on Syria is naïve to the point of doltishness. But Hillary’s Syrian war plan—shared by most of her Republican rivals—borders on the pathological. Having not missed a minute of sleep haunted by the corpses of Libya, Mrs. Clinton is now stumping for the dismantling of Syria, using the carefully cultivated domestic anxiety over ISIS as the pretext. The cornerstone of Hillary’s rogue scheme is the imposition of a no fly zone over that embattled country.
Sounds like a relatively benign plan, right? But wait. ISIS doesn’t have an air force. They don’t even a have drone. Russia, of course, is flying daily sorties in Syrian air space, at the invitation of the Syrian government, such as it is, and some kind of confrontation would be inevitable. Still, Hillary doesn’t flinch. She has zealously vowed to shoot down any Russian plane that violated her unilateral ban.
Yet NATO’s latest recruit, Turkey, jumped the gun. Erdogan’s trigger-happy generals didn’t wait for any such fanciful legalisms and downed a Russian jet for momentarily breaching (perhaps) Turkish airspace. Then Turkamen fighters gleefully trained their machine-guns on the plane’s pilots as they slowly parachuted toward the desert. Vladimir Putin fulminated boisterously to his domestic audience, but prudently declined to retaliate against the Turks, perhaps intuiting that it would snap a tripwire for a full-frontal confrontation with NATO.
Everyone has been consulted about the future of Syria, except the Syrians themselves. Why? Because simply, Syrians don’t matter. They are quite beside the point. Thanks to fresh reporting by Seymour Hersh, we now know that the subtext for Obama administration’s Syrian strategy, dating back to Clinton’s tenure at the State Department, has been largely geared toward ensnaring Russian in the Levantine quagmire. This is chaos theory marketed as foreign policy.
The rubble of modern Syria has become a multi-national bombing range, a kill zone of neo-Cold War contention. Each new act of domestic terrorism, from Paris to San Bernardino, has been used to rationalize more airstrikes on Syria, even though the killers in both slaughters seemed mainly to be attempting to impress the terror network, which is like blaming Jodie Foster for inspiring John Hinkley’s wild fusillade at Reagan and his entourage.
Even Putin, that prickly hero to some precincts of the anti-imperialist Left, has upped the ante by threatening to launch a nuclear strike against ISIS in response to the bombing of a Russian passenger plane over the Sinai, even though there’s no direct evidence that the bomb was planted by the mad men of Daesh. Not to be outdone, Ted Cruz, the natural-born Canadian, has vowed to make the sands of Raqqa glow, despite the fact that few Americans could point to Raqqa on a map or explain why this city of a quarter-million people should be incinerated in retribution for the murderous rampage by the Bonnie and Clyde of San Berdoo.
The war on terror has exploded in the face of the West, with spreading mayhem across the Middle East and unraveling conditions on the home front. One chilling measure of the savage toll from 14 years of war is the rate of military suicides in the US, which now total more than 4000 since the first cruise missiles struck Afghanistan. There is a desperate motive to externalize the blame for this bleak situation, to target a scapegoat. The rancid resumes of ISIS and the despotic Assad regime make Syria a convenient landscape for more imperial bloodletting. There’s not even the faintest flicker of an anti-war movement left to impede their shameful enterprise.
In this comedy of terrors, the apex predators are the familiar ones circling overhead, waiting to blow Syria apart and plunder its bones.
- China Exports Crash Most In 6 Months Despite "Devalued" Yuan
Despite the weakening of the Yuan, China exports collapses 6.6% YoY in January (massively missing the 3.6% increase expected). Imports continued their 15 month series of collapses with a 14.4% plunge (again drastically worse than the 1.8% increase expected). This pushed the trade balance to a record surplus CNY406bn.
In Yuan terms it's ugly… Both imports and exporets were worse than the lowest forecast of all professional economists…
But in USD terms it's a disaster…
Of course, between Japan's disastrous GDP and China's trade collapse, this is great news for those demanding moar as excuses for extreme monetary policy are just piling up in the ashes of previous failed policies.
Between ugly Japanese GDP, and miserable Chinese trade data, it is surprising futures aren't up more
— zerohedge (@zerohedge) February 15, 2016
Of course what everyone is really waiting for is the Hong Kong trade data to see just how much capital "leaked"…
- When Trust Is Bust – All The Charts You Can Eat
In his inimitable manner, Abraham Gulowitz unleashes 18 new pages of "all the charts you can eat" to expose the ugly reality of what is going on everywhere.
Trust Busters…
Market participants had penciled in stronger economies for 2016 and even a series of rate hikes by the Fed. Feeble world growth signals, the fallout from crashing oil and a weaker China plus tumultuous markets have combined to seriously dent expectations and encourage a serious reassessment of economic and financial prospects. Global equity prices have slumped by double digits so far this year and risk aversion has spread rapidly through the credit markets.
Reliable indicators of previous recessions have started to flash danger signals. We highlight several of these stats in this issue, and though specific explanations can be found to excuse each of these data readings, the abundance of warning indications cannot be dismissed. Both corporations and central bankers have queued up to warn about increased downside risks to the business and financial outlook, while at the same time seeking to reassure that renewed downturns are still likely to be avoided. But the risks have already increased that financial market conditions may yet feed through to the real business economy.
The greatest disappointment has to be the meager results emanating out of the massive and unprecedented easing around the globe. There is now little confidence in even the drastic measures that have been undertaken by central banks.
The experiments with negative interest rates conducted by a number of central banks trying to ward off deflation – – Switzerland, the eurozone and Denmark among them – – and now Japan, have yet to provide definitive conclusions. It does demonstrate, however, that too many economies are still struggling to grab onto sustainable growth paths with positive pricing power.
Engines of Growth are Sputtering…
Intense and confusing stress signals emanating from around the globe but particularly from China, the commodity markets, high yield and key emerging markets have confounded investors and contributed to intermittent bouts of severe volatility. Despite extensive and massive easing, most of the global economy still faces woefully inadequate growth prospects and difficult policy options.
The U.S. stands alone in the shift in monetary policy and the improvement in job markets.
Very obvious financial vulnerabilities and serious geopolitical concerns are aggravating the uncertainty. And let’s not forget that many of the challenges are not fleeting, and many cannot be resolved easily or quickly…
Abe Gulkowitz's full "The PunchLine…" letter is below:
- PBOC Strengthens Yuan Most In 3 Months As China Stocks Tumble After Holiday
With China returning from the Spring Golden Week holiday, it is catch-up time for the Yuan (notably higher against a weakening USD) and Chinese stocks (significantly lower – though not as much as some might have expected given China ETFs). The PBOC strengthened the Yuan Fix by the most since the first week of November, catching it up to the 15 handle strengthening in offshore Yuan since the pre-holiday lows.
The Yuan Fix is significantly higher…
As it catches up to the huge strengthening in offshore Yuan (thought note that CNH is being sold pretty hard as China opens)..
But it appears someone is not happy about the selling…
And equities are catching down to the rest of the world's weakness…
But not as much as expected…
- *SHANGHAI COMPOSITE FALLS 2.8% AT OPEN
- *CHINA'S CSI 300 INDEX SET TO OPEN DOWN 2.5% TO 2,888.43
All this is happening just hours PBOC Governor Zhou Xiaochuan broke his long silence to say there’s no basis for continued yuan depreciation… which is exactly what he would say after a capital outflow of $1 trillion in the past 18 months.
The nation’s balance of payments is good, capital outflows are normal and the exchange rate is basically stable against a basket of currencies, Zhou said in an interview published Saturday in Caixin magazine.
As Bloomberg writes, that’s an escalation in verbal support after such comments have been left in recent months to deputies and the central bank research department’s chief economist. Zhou dismissed speculation that China plans to tighten capital controls and said there’s no need to worry about a short-term decline in foreign-exchange reserves. The country has ample holdings for payments and to defend stability, he said.
"He’s desperately trying to make sure that all of his work in the past few years on capital liberalization does not go to waste," said Victor Shih, a professor at the University of California at San Diego who studies China’s politics and finance. "He’s trying hard to instill investor confidence in the renminbi so that the Chinese government does not have to resort to the extreme measure of unwinding all of the progress on offshore renminbi in the past few years."
The comments come as Chinese financial markets prepare to reopen Monday after the week-long Lunar New Year holiday. The weakening exchange rate and declining Chinese share markets have fueled global turmoil and helped send world stocks to their lowest levels in more than two years.
Here is DB's Zhang Zhiwei with his own take on Zhou's comment, according to which China will continue devaluing, but only after stability has returned to the market
We maintain our baseline forecast of USDCNY at 7.0 by the end of 2016. After revision, our probability forecasts for the USDCNY exchange rate are: 10% chance of CNY appreciation against the USD by the end of 2016 from its level of 6.49 at the end of 2015; 25% chance of CNY depreciation by 0-5%; 55% chance of 5-10% depreciation; and 10% chance of more than 10% depreciation.
These revisions are based on comments from an interview conducted with the PBoC Governor Zhou Xiaochuan, which was published on Feb 14 by the Mainland Chinese journal Caixin. We believe this interview is important, as it represents the first time the Governor has spoken about the FX policy since the depegging of the CNY against the US dollar on Aug 11 last year. It is also interesting that he chose to speak right ahead of the Chinese stock market’s reopening after a long holiday.
Here is the most important statement made by the Governor in the interview: "For a large country like China, the FX reform may need some time to be achieved. China tries to balance reform, growth, and stability. The global economy is still recovering from crisis. It also needs to balance reform, growth, and stability. We are pragmatic and patient. The ultimate goal is clear for us, but we don't aim to go that direction in a single-minded way. We want to reform, but we also need to be a responsible economic power." This is based on our translation of the original interview published in Chinese.
To us, this statement shows that (1) the PBoC is still committed to FX policy reform from a dollar peg to a floating regime in the long term; (2) the global financial market volatility has likely closed the window for now; and (3) the PBoC will likely stick to the dollar peg for now, and wait for the next window to float the currency.
We therefore believe the chance for a large devaluation in the short term has declined. The PBoC will wait for the next "window" to float the currency. A key consideration is the global financial and economic conditions.
It remains to be seen if the market will grant the PBOC the window it needs for another devaluation, one which would unleash the next bout of volatility that sends us all back to China-inspired market chaos square one.
- How The Clintons Enabled The 2008 Economic Crisis And Financial Coup d'Etat
Submitted by Jesse via Jesse's Cafe Americain blog,
"The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises.
If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time."
– Simon Johnson, The Quiet Coup
“A true opium of the people is a belief in nothingness after death – the huge solace of thinking that for our betrayals, greed, cowardice, and even murders that we are not going to be judged.”
– Czes?aw Mi?osz
As economist Simon Johnson put it so aptly, there was a 'financial coup d'etat' in the States. It was the result of a longer term and well-funded effort as documented by PBS Frontline and others.
People forget all too quickly what has happened, even things that happened less than twenty years ago. Perhaps it is easily forgotten because there are so few counterexamples of honesty and decency these days in government and business to hold up in comparison. The UK and Canada are following in lockstep, as well as the central government for Europe in Brussels.
The Clintons, along with a large group of Republican Congressmen and compliant Democrats, put a 'for sale' sign not only on the Lincoln bedroom as you may recall, but on the rest of the White House and the Capitol, and indeed, the well being of the people of the United States.
They certainly did not do it alone, as it was a bipartisan effort to overturn the protections established in the darker days of the Great Depression. But the money was good, and it was there for the taking, and with it the enormous power to threaten or reward those around them.
And it became the thing to do in Washington and New York, to partner up with big money to take the public for a wild ride, as we have not seen since the beginning of the last century. Once again capitalism was unfettered, and became the rawest, the worst kind of short sighted and self-dealing 'capitalism' that is more corrosive looting than productive asset allocating. And so the New York – Washington metroplex enthusiastically engaged in a program of fabulous gains for themselves, and longer term pain for the country.
I do not have to read Robert Scheer's account to understand it; I saw this happening with my own eyes, almost in slow motion, as one might watch the events leading up to a train wreck. The actions of the participants were deliberate, and focused solely on amassing enormous fortunes for themselves and their friends, and damn the people and the consequences.
What the Clintons did was not to invent soft graft of political contributions and gratuities, sinecure positions after public office, and ridiculously generous payment for speeches and appearances. No, what they did was take what had been reviled as the worst of politics in craven service to big corporate interests, which had been largely but not exclusively the hallmark of their political opponents who were well established as servants to the corporate interests, and make it not only acceptable for establishment liberals, but downright fashionable.
Why would the Clintons, that wonderfully privileged and intelligent couple, do such a coarse and craven thing? One might think of about $130 million reasons offhand. Is anything just that simple? And what would you do if you were offered $130 million in easy money for you and your family to make a few key decisions, to look the other way at times, while having no fear of punishment, with all your many sins forgotten, excused, and ignored by a compliant press?
Oh yes, you are an angel and would of course say no, even if the corruption was unrolled slowly, one step at a time. But what do you think that the fellow next to you would do? The ones who cut people off in traffic, makes the rules for themselves, wishing to have their own way, to have power and a place at the highest table?
Is this a system likely to be honest, just, and sustainable? Is it designed for fairness and rewarding the best and most productive behaviour?
And like the utopian efficient market hypothesis, we are expected to believe that the powerful men of Big Money are just men of civic virtue who will give millions upon millions of dollars to politicians and expect nothing but fairness and objectivity in return, even if it is to their own disadvantage as required by justice.
No wonder so many politicians have become little more than marketing projects for Big Money, like brands of toothpaste and soft drinks. Pick any flavor that you wish, but despite the appearances of difference, they are all owned by just four or five big corporate interests, as is the mainstream media. Which by the way was enabled by the Clintons overturning the Fairness Doctrine.
A number of the old hands of politics see where this is heading, and have already taken the money and run, some to hide in their studies, to try and create a new legacy for themselves, and others to move to K Street as lobbyists and get filthier rich while it lasts.
But the problem still remains, Once thoroughly corrupted, a system finds it hard to correct itself, especially if the consequences for big rewards are more of an inconvenience than punishment, if there are any serious drawbacks at all.
The American people seem to be attempting to rouse themselves, to use their right of suffrage to bring about the change, the necessary reform, that has eluded them for quite some time. Let us hope that this effort will not be squashed in the manner of other protests, such as Occupy Wall Street, have been through almost ruthless and coordinated nationwide public relations campaigns and even violence from the government and the media.
The ‘Clinton Bubble’: How Clinton Democrats Fostered the 2008 Economic Crisis
By Robert Scheer
Since the collapse happened on the watch of President George W. Bush at the end of two full terms in office, many in the Democratic Party were only too eager to blame his administration. Yet while Bush did nothing to remedy the problem, and his response was to simply reward the culprits, the roots of this disaster go back much further, to the free-market propaganda of the Reagan years and, most damagingly, to the bipartisan deregulation of the banking industry undertaken with the full support of “liberal” President Clinton. Yes, Clinton. And if this debacle needs a name, it should most properly be called “the Clinton bubble,” as difficult as it may be to accept for those of us who voted for him.
Clinton, being a smart person and an astute politician, did not use old ideological arguments to do away with New Deal restrictions on the banking system, which had been in place ever since the Great Depression threatened the survival of capitalism. His were the words of technocrats, arguing that modern technology, globalization, and the increased sophistication of traders meant the old concerns and restrictions were outdated. By “modernizing” the economy, so the promise went, we would free powerful creative energies and create new wealth for a broad spectrum of Americans—not to mention boosting the Democratic Party enormously, both politically and financially.
And it worked: Traditional banks freed by the dissolution of New Deal regulations became much more aggressive in investing deposits, snapping up financial services companies in a binge of acquisitions. These giant conglomerates then bet long on a broad and limitless expansion of the economy, making credit easy and driving up the stock and real estate markets to unseen heights. Increasingly complicated yet wildly profitable securities—especially so-called over-the-counter derivatives (OTC), which, as their name suggests, are financial instruments derived from other assets or products—proved irresistible to global investors, even though few really understood what they were buying. Those transactions in suspect derivatives were negotiated in markets that had been freed from the obligations of government regulation and would grow in the year 2009 to more than $600 trillion…
Clinton betrayed the wisdom of Franklin Delano Roosevelt’s New Deal reforms that capitalism needed to be saved from its own excess in order to survive, that the free market would remain free only if it was properly regulated in the public interest. The great and terrible irony of capitalism is that if left unfettered, it inexorably engineers its own demise, through either revolution or economic collapse. The guardians of capitalism’s survival are thus not the self-proclaimed free-marketers, who, in defiance of the pragmatic Adam Smith himself, want to chop away at all government restraints on corporate actions, but rather liberals, at least those in the mode of FDR, who seek to harness its awesome power while keeping its workings palatable to a civilized and progressive society.
Government regulation of the market economy arose during the New Deal out of a desire to save capitalism rather than destroy it. Whether it was child labor in dark coal mines, the exploitation of racially segregated human beings to pick cotton, or the unfathomable devastation of the Great Depression, the brutal creativity of the pure profit motive has always posed a stark challenge to our belief that we are moral creatures. The modern bureaucratic governments of the developed world were built, unconsciously, as a bulwark, something big enough to occasionally stand up to the power of uncontrolled market forces…
Read the entire article with a link to the preceding excerpt from the book here.
- Who Said It 13 Years Ago?: "Mr. Greenspan, You Are Way Out Of Touch"
As you might have noticed, Bernie Sanders isn’t exactly enamored with the growing divide between the rich and the poor in America.
In fact, the firebrand senator from Vermont hates inequality worse than just about anything else in the world, and he’s pretty clearly willing to make the federal government even more bankrupt than it already is if it means leveling the playing field for the country’s beleaguered masses who have been forced to watch as trillions in QE have made the likes of Jamie Dimon and Lloyd Blankfein billionaires even as wage growth for everyday Americans remains stuck in neutral.
Make no mistake, a big part of why the haves are increasingly better off than the have-nots in America is Fed policy. By inflating the value of the assets most likely to be concentrated in the hands of the rich, you are deliberately exacerbating income inequality. Or, as Hank Paulson put it: “we made it wider!”
Of course Ben Bernanke will tell you this isn’t the case. It’s the whole “wealth effect” idea, whereby driving up stock prices is supposed to make Joe The Plumber feel better about his 401k, which was wiped out in a flurry of collapsing counterparty chaos in September of 2008. Additionally, banks are supposed to be lending their excess reserves thus stimulating the real economy. Only that’s not what’s happened. Mom and pop up and left the market and never came back after the crash and economic growth is so subdued that the credit impulse simply isn’t there.
Instead, all the Fed did was make the rich richer. Much richer. So rich in fact, that Modiglianis are now going for $170 million even as a record number of Americans are on food stamps.
Now that Bernie Sanders has emerged as a very serious contender for The White House and now that the world has suddenly woken up to the fact that central bankers may have no idea whatsoever about what they’re doing, we thought this an opportune time to bring you the following blast from the past, in which Bernie Sanders lambasts Alan Greenspan (the “maestro” of all that’s wrong with the American economy) in a truly epic diatribe that will have you torn between your hatred for central bankers and your aversion to socialism. Enjoy.
“Mr. Greenspan, I have long been concerned that you are way out of touch”…
- A Contagious Crisis Of Confidence In Corporate Credit
Excerpted from Doug Noland's Credit Bubble Bulletin,
Credit is not innately good or bad. Simplistically, productive Credit is constructive, while non-productive Credit is inevitably problematic. This crucial distinction tends to be masked throughout the boom period. Worse yet, a prolonged boom in “productive” Credit – surely fueled by some type of underlying monetary disorder – can prove particularly hazardous (to finance and the real economy).
Fundamentally, Credit is unstable. It is self-reinforcing and prone to excess. Credit Bubbles foment destabilizing price distortions, economic maladjustment, wealth redistribution and financial and economic vulnerability. Only through “activist” government intervention and manipulation will protracted Bubbles reach the point of precarious systemic fragility. Government/central bank monetary issuance coupled with market manipulations and liquidity backstops negates the self-adjusting processes that would typically work to restrain Credit and other financial excess (and shorten the Credit cycle).
A multi-decade experiment in unfettered “money” and Credit has encompassed the world. Unique in history, the global financial “system” has operated with essentially no limitations to either the quantity or quality of Credit instruments issued. Over decades this has nurtured unprecedented Credit excess and attendant economic imbalances on a global scale. This historic experiment climaxed with a seven-year period of massive ($12 TN) global central bank “money” creation and market liquidity injections. It is central to my thesis that this experiment has failed and the unwind has commenced.
The U.S. repudiation of the gold standard in 1971 was a critical development. The seventies oil shocks, “stagflation” and the Latin American debt debacle were instrumental. Yet I view the Greenspan Fed’s reaction to the 1987 stock market crash as the defining genesis of today’s fateful global Credit Bubble.
The Fed’s explicit assurances of marketplace liquidity came at a critical juncture for the evolution to market-based finance. Declining bond yields by 1987 had helped spur rapid expansion in corporate bonds, GSE securitizations, commercial paper, securities financing (i.e. “repos,” Fed funds, funding corps) and derivative trading (i.e. “portfolio insurance”). Post-crash accommodation ensured that the Federal Reserve looked the other way as Bubbles proliferated in junk bonds, leveraged buyouts and commercial and residential real estate on both coasts.
It’s instructive to note that period’s momentous financial innovation/expansion. In the 10-year period 1986 to 1995, total Debt Securities (from Fed Z.1 report) surged $7.097 TN, or 159%, to $11.574 TN. For comparison, bank Loans increased 73% ($3.309 TN) to $7.839 TN. Leading the charge in marketable debt issuance, GSE Securities (with their implied government backing) surged 283% ($1.777 TN) to $2.406 TN. Corporate Bonds jumped 254% ($2.213 TN) to $3.085 TN. Outstanding Asset-Backed Securities inflated an incredible 1,692% ($626bn) to $663 billion.
The other side of issuance boom was a revolution in the structure of financial asset management. Mutual Fund assets inflated 653% ($1.607 TN) during the ‘86-‘95 period to $1.853 TN. Money Market Fund assets surged 206% ($499bn) to $741 billion. Security Broker/Dealer assets jumped 288% ($860bn) to $1.159 TN. Wall Street Funding Corps rose 195% ($242bn) to $366 billion, and Fed Funds and Security Repurchase Agreements increased 171% ($802bn) to $1.271 TN. Certainly also worth noting, over this period the global derivatives market expanded from almost nonexistence to about $64 TN.
Market-based Credit is highly unstable. Predictably, the evolution to market finance created persistent instability and, over time, acute fragilities. The early-nineties saw the bursting of Bubbles in junk bonds, M&A and commercial real estate. The neglected S&L crisis festered from a few billion-dollar problem to a $300 billion debacle. By 1991, the U.S. banking system was significantly impaired.
There was a school of thought that S&L losses were akin to money flushed down the toilet. It had been destroyed and should simply be replaced with new money. “Helicopter money” was not yet reputable – much less fancied. So the Greenspan Fed instead slashed rates, manipulated the yield curve and accommodated the rapid expansion of market-based finance. If not for the ’87 bailout, the early-nineties stealth bailout and cultivation of non-bank Credit would not have been necessary.
Spurring market-based Credit – and the financial markets more generally – proved the most powerful monetary policy mechanism ever. The collapse in the Soviet Union couple with the proliferation of new technologies provided powerful impetus to New Paradigm and New Era thinking.
The unfolding historic inflation of “money” and Credit by the world’s reserve currency did not come without profound consequences. Massive U.S. Current Account Deficits flooded the world with dollar balances. Meanwhile, the flourishing leveraged speculating community broadened their targets from U.S. debt markets to higher yielding securities around the world.
By 1993, market-based finance and leveraged speculation was gaining momentum globally. Apparently there was no turning back. So it’s been serial booms, busts and progressively more audacious policy accommodation ever since. The GSEs bailed out the bond, MBS and derivative markets in 1994, ensuring much more spectacular Bubbles to come. The 1995 Mexican bailout created a backdrop ensuring that fledgling “Asian Tiger” Bubbles inflated precariously. When those Bubbles chaotically imploded in 1997, the perception took hold that the West would never allow Russia to collapse. Such thinking spurred speculative excess in Russian debt and currency derivatives that imploded in September, 1998.
Global Bubble Dynamics had certainly taken deep root by 1998. U.S.-style financial innovation was taking hold throughout Asia and Europe. Financial flows were booming across the markets, and the world’s big financial conglomerates were aggressively adopting securitization, speculation and globalization. Moreover, a booming leveraged speculating community, with trades propagating across the globe, ensured increasingly tight linkages between international markets. When Long-Term Capital Management (LTCM) – with egregious leverage along with $2.0 TN of notional derivative exposures around the globe – failed in the fall of 1998, it was a case of top U.S. officials acting as the “committee to save the world.”
The Bubble saved back in 1998/99 has inflated uncontrollably and today has the world at the precipice. Historic debt expansion unfolded virtually everywhere, much of it tradable in the marketplace. The global leveraged speculating community has inflated from about $400 billion to $3.0 TN. Global derivatives have exploded to $700 TN. An ETF complex has risen from nothing to more than $3.0 TN.
The LTCM bailout ensured an almost doubling of Nasdaq in 1999, with that Bubble imploding in 2000. I’m not so sure the euro currency would exist in its current form if not for the efforts of “the committee…”. Leveraged speculation played an instrumental role in the collapse in Italian and Greek bond yields, a miraculous development that proved pivotal for highly indebted Greece and Italy’s inclusion in the euro monetary regime. I also believe that the U.S. Credit Bubble, fueled largely by the GSEs and non-bank Credit creation, played prominently in the huge flows boosting the euro currency. Global demand for euro-based securities created fatefully loose Credit conditions for the likes of Greece, Portugal, Ireland, Italy and Spain.
If not for the “committee to save the world” and the 1998 bailouts, I doubt we would have witnessed the rise of “Helicopter Ben.” The ’87 stock market crash drove fears of another depression. Depression worries returned with the early-nineties banking crisis, and then again in 1998. When U.S. stock and corporate bond Bubbles burst in 2000-2002, Dr. Bernanke, the foremost expert on the Great Depression, was summoned to the Federal Reserve to provide the theoretical framework for a major reflationary effort.
With Wall Street cheering all the way, the Greenspan/Bernanke Fed collapsed rates and targeted (the fledgling Bubble in) mortgage Credit as the primary mechanism for system reflation. Mortgage Credit doubled in almost six years, in the process inflating home prices, corporate profits, securities prices and incomes. Much more so than the “tech” Bubble, the mortgage finance Bubble became deeply systemic. Unprecedented Current Account Deficits, the weak dollar and enormous speculative flows further inundated the world with finance. As the U.S. Credit Bubble became increasingly global, policymakers around the world remained too (pro-global Bubble) accommodative.
The bursting of the mortgage finance Bubble almost incited global financial collapse. It took concerted central bank intervention, $1.0 TN of Bernanke QE, unprecedented bailouts, zero rates and massive fiscal stimulus to hold catastrophe at bay. Massive monetary stimulus pushed fledgling EM and China Bubbles to historic ("blow-off") extremes. The Chinese instituted a $600 billion stimulus package then proceeded to completely lose control of their financial and economic Bubbles. QE, zero rates and dollar devaluation incited a spectacular Global Reflation Trade that has collapsed spectacularly. Ultra-loose finance on a global basis ensured epic over- and malinvestment throughout the energy and commodity sectors. Virtually free-“money” incited massive over-investment in manufacturing capacity, especially throughout China and Asia. In the U.S. and globally, zero rates and liquidity excess fueled crazy tech and biotech Bubbles 2.0.
Along the way the global government finance Bubble became deeply systemic. Zero rates and QE inflated securities markets and asset prices on an unprecedented scale. Leveraged securities speculation engulfed the entire globe. Derivatives trading became globalized like never before. And each instance of market vulnerability was met with an aggressive concerted central bank response. As the global Bubble succumbed to “blow off” excess, central bankers completely lost control of inflationary processes.
The European Bubble was at the precipice in 2012. If not for Bernanke’s QE gambit, I seriously doubt Draghi and Kuroda would have ever succeeded in pushing their massive “money” printing operations through the ECB and BOJ. With the Fed, ECB, BOJ and others moving forward with “whatever it takes” concerted QE, global securities Bubbles morphed into one big play on the global monetary experiment.
It’s now been more than three years of absolute monetary disorder. The commodities Bubble went bust, which, in the age of over-liquefied and speculative global markets, worked to spur only greater “blow off” excess throughout global securities markets. The EM Bubble burst, which provoked only greater stimulus measures in China. Chinese reflationary policies incited precarious “blow off” stock and bond market excesses. The timid Fed’s failure to begin rate normalization spurred speculative Bubble excess throughout equities, fixed-income and derivative markets.
On an unprecedented global scope, extreme monetary measures fueled financial excess at the expense of real economies. Monetary disorder and Bubble Dynamics ensured highly destabilizing wealth redistribution – within and between nations. Extreme central bank policies spurred leveraged speculation around the globe. Extraordinary devaluation measures from the ECB and BOJ ensured the euro and yen were used aggressively for leveraged “carry trade” speculations. “Carry trade” and currency derivative-related leverage became powerful sources of liquidity driving securities market “blow off” excess – again on a globalized basis. With the global Bubble faltering, risk is now too high to maintain highly leveraged bets.
In the face of faltering energy and commodities, weakening CPI trends, a highly vulnerable global economic backdrop and mounting social and geopolitical tension, highly unstable global securities markets lurched higher. It all became one gargantuan bet on the global central bank experiment with boundless monetary stimulus. Global securities markets diverged from fundamental economic prospects like never before.
In the end, the runaway global Bubble was built chiefly upon confidence in central banking and policymaking more generally. Markets then rather abruptly lost confidence in the ability of Chinese officials to manage their faltering Bubbles. With the historic Chinese Credit and economic Bubbles at risk of imploding – and energy and commodities collapsing – faith in the capacity of global central bankers to keep the game going began to wane. The sophisticated leveraged players commenced risk reduction – and suddenly there were few buyers. Instead of more QE, central bankers have responded to “risk off” with negative interest rates. Negative rates don’t alleviate market illiquidity and they won’t bolster faltering global Bubbles. They do intensify the unfolding crisis of confidence.
Between the faltering Chinese Bubble and the unwind of securities market speculative leverage globally, global Credit and economic backdrops have turned ominous. The downside of a historic global Credit cycle has commenced. De-risking/de-leveraging ensure a process of much tighter Credit conditions. This is problematic for leveraged speculators, companies, countries and regions – certainly including banks and securities firms around the world.
Negative rates, collapsing energy companies and weak global prospects hurt bank sentiment. Yet bank stocks are collapsing globally because of the faltering global Credit Bubble. Between waning confidence in central banking and the global banking system, one is left to question the functioning of global derivatives markets. And if counter-party risk becomes an issue in the global risk “insurance” marketplace, global securities markets quickly face a potentially catastrophic backdrop.
A tremendous number of bets were placed based on a world of ongoing liquidity abundance, risk embracement and growth. In a “risk on” world of cheap finance, the latest Greek bailout strategy appeared manageable. In today’s “risk off” faltering global Bubble reality, Greece is a disaster. Greek sovereign yields were up 370 bps in six weeks. A bursting global Bubble will shake confidence in the European periphery – and likely European integration more generally. Periphery spreads widened meaningfully again this week.
Here at home, contagion effects have made it to the investment-grade corporate debt market. In “risk on,” loose “money” as far as the eye can see, writing insurance on corporate Credit (CDS) became a quite popular endeavor. But with the market now questioning the global economy, central bank efficacy, and the soundness of the banking system and Wall Street firms, it makes more sense to unwind previous speculations and buy insurance. This equates to a major unwind of leverage throughout the corporate debt marketplace, in addition to huge amounts of additional selling to hedge new CDS trades. Suddenly, liquidity abundance is transformed into problematic marketplace illiquidity. Again, a major tightening in Credit conditions bodes ill for leveraged entities. It also bodes ill for the general economy – the Credit Cycle's self-reinforcing downside.
Booming international corporate debt markets have been instrumental in fueling the global securities market boom – and the Global Credit Bubble more generally. And I would add that perceived low-risk corporate Credit has been at the (Crowded) epicenter of the central bank-induced “Moneyness of Risk Assets” phenomenon. If I’m right on the unfolding global backdrop, prospects for corporate Credit as a liquid store of value are dismal. A Crisis of Confidence in Corporate Credit would severely impact an already fragile global financial and economic backdrop.
- In Milestone, Iran Ships First Oil To Europe Since Sanctions Lifted
In case you haven’t noticed, Iran is on a roll.
Much to the chagrin of Israel and any number of GOP lawmakers in the US, the nuclear accord is a done deal and creates a $100 billion windfall for Tehran.
And that’s just the beginning of the story.
Starting in Q1, Iran will ramp crude production by 500,000 b/d and by 1,000,000 b/d by year end. The sharp increase in production is expected to help Iran quintuple its oil revenue by the end of 2016 compared to what the country was pulling in while languishing under international sanctions.
Assuming $29/ barrel crude, Iran would bring in some $2.35 billion a month assuming production of 2.7 million b/d, which is below the 2.86 million b/d that Tehran actually pumped in January.
Of course we shouldn’t put it in dollar terms. After all, Iran prefers euros. But not for “political reasons” – it’s business not personal (see here).
Iran’s return to the world stage and effort to shed the pariah state label comes just as the country is poised to score a dramatic win in Syria, where the IRGC and Hezbollah are battling to preserve the Shiite crescent by restoring the Alawite government’s hold on the country. Thanks to Russian air support, that effort is now going swimmingly, and it has Riyadh, Ankara, Doha, and the entire Sunni world in a state of frightened disbelief.
Tehran is also ramping up its already impressive ballistic missile program. In October, and then again in November, Iran tested the Emad, a next generation surface-to-surface weapon with the range to hit arch rival Israel.
On Sunday, Iran marked yet another milestone. The country loaded its first cargo of oil to Europe since sanctions were lifted.
“A tanker for France’s Total SA was being loaded at Kharg Port while vessels chartered for Chinese and Spanish companies were due to arrive later Sunday,” Bloomberg reported earlier today, citing an Iranian oil ministry official. “A tanker hired by a Russian company hadn’t arrived, and was still expected, the official said.” Here’s more:
The Suezmax vessel Distya Akula, chartered by Lukoil PJSC’s trading unit Litasco, departed Iran’s loading terminal at Kharg Island in the Persian Gulf and was located Saturday in the Gulf of Oman off the east coast of the United Arab Emirates, according to ship tracking data compiled by Bloomberg. Suezmaxes can hold 1 million barrels of oil. The draft of the Distya Akula vessel in the water indicated it is full, according to the data.
Supply deals were signed with Total and Hellenic Petroleum SA of Greece.
Total, Spanish refiner Compania Espanola de Petroleos and Russia’s Lukoil PJSC all booked cargoes of Iranian crude to sail from Kharg Island to European ports, according to shipping reports compiled by Bloomberg earlier this month. The vessels included one very large crude carrier, a tanker capable of carrying 2 million barrels of crude, and two smaller Suezmax-sized vessels with capacity of about 1 million barrels each.
Aside from what this represents symbolically for Tehran, this means that Iranian supply is now officially set to flood an already oversupplied market. That is, after nine months of speculation, Iran is now back to market and that means still more supply at a time when the world’s storage capacity is very nearly exhausted.
But oil bulls need not despair. Because the first time a Turkish mortar kills a Hezbollah fighter in Aleppo, the world will careen into a global armed conflict and if that doesn’t send oil back to $100, nothing will.
- Peter Pan Is Dead – Japanese Economy Stalls For 6th Time In 6 Years
We just cannot wait for the next time either Abe or Kuroda utter the following string of words "[stimulus – insert any combination of equity buying, bond buying, money printing, and NIRP] is having the desired effect." For the sixth time in the last 6 years, GDP growth has once again turned negative and while the BoJ balance sheet continues to balloon, so the nation's economy (as measure by GDP) is now shrinking as Peter Pan policy is officially dead.
With 3 of the top 4 forecasters already suggesting Japanese GDP growth would be worse than the median estimate of -0.2% growth, fairy-tales were all they had left… Nearly a year ago, Bank of Japan governor Haruhiko Kuroda described the unlikely inspiration behind Japan’s unprecedented monetary stimulus: Peter Pan.
I trust that many of you are familiar with the story of Peter Pan, in which it says, ‘the moment you doubt whether you can fly, you cease forever to be able to do it’.
Yes, what we need is a positive attitude and conviction. Indeed, each time central banks have been confronted with a wide range of problems, they have overcome the problems by conceiving new solutions.
And now, Pan is dead… this is the 6th negative GDP growth period since 2010… printing a 0.4% QoQ drop against the -0.2% growth expectation…
This is the biggest SAAR GDP drop (down 1.4%) since Q2 2014 – right before Kuroda unleashed QQE2 once The Fed had left the money-printing business.
And in case anyone wanted it made any clearer just what an utter farce Abenomics has been…
But it gets much worse…
Private Consumption tumbled more than expected…
- *JAPAN 4Q PRIVATE CONSUMPTION FELL 0.8% Q/Q
The biggest drop since Q2 2014.
Of course – if you are an "enabler" or "central planner" this is great news – just a little more NIRP and just a little more QQE and everything will be fine… what a joke!
Japan GDP has to be a big miss to give BOJ political cover for going Peter Panic
— zerohedge (@zerohedge) February 14, 2016
* * *
And in just a few hours we get to see China's made-up trade data.
Charts: Bloomberg
- The Age Of Stagnation (Or Something Much Worse)
Excerpted from Satyajit Das' new book "The Age Of Stagnation",
If you look for truth, you may find comfort in the end; if you look for comfort you will not get either comfort or truth, only . . . wishful thinking to begin, and in the end, despair. C.S. Lewis
The world is entering a period of stagnation, the new mediocre. The end of growth and fragile, volatile economic conditions are now the sometimes silent background to all social and political debates. For individuals, this is about the destruction of human hopes and dreams.
One Offs
For most of human history, as Thomas Hobbes recognised, life has been ‘solitary, poor, nasty, brutish, and short’. The fortunate coincidence of factors that drove the unprecedented improvement in living standards following the Industrial Revolution, and especially in the period after World War II, may have been unique, an historical aberration. Now, different influences threaten to halt further increases, and even reverse the gains.
Since the early 1980s, economic activity and growth have been increasingly driven by financialisation – the replacement of industrial activity with financial trading and increased levels of borrowing to finance consumption and investment. By 2007, US$5 of new debt was necessary to create an additional US$1 of American economic activity, a fivefold increase from the 1950s. Debt levels had risen beyond the repayment capacity of borrowers, triggering the 2008 crisis and the Great Recession that followed. But the world shows little sign of shaking off its addiction to borrowing. Ever-increasing amounts of debt now act as a brake on growth.
Growth in international trade and capital flows is slowing. Emerging markets that have benefited from and, in recent times, supported growth are slowing.
Rising inequality and economic exclusion also impacts negatively upon activity.
Financial problems are compounded by lower population growth and ageing populations; slower increases in productivity and innovation; looming shortages of critical resources, such as water, food and energy; and manmade climate change and extreme weather conditions.
The world requires an additional 64 billion cubic metres of water a year, equivalent to the annual water flow through Germany’s Rhine River. Agronomists estimate that production will need to increase by 60–100 percent by 2050 to feed the population of the world. While the world’s supply of energy will not be exhausted any time soon, the human race is on track to exhaust the energy content of hundreds of millions years’ worth of sunlight stored in the form of coal, oil and natural gas in a few hundred years. 10 tons of pre-historic buried plant and organic matter converted by pressure and heat over millennia was needed to create a single gallon (4.5 litres) of gasoline.
Europe is currently struggling to deal with a few million refugees fleeing conflicts in the Middle East. How will the world deal with hundreds of millions of people at risk of displacement as a resulting of rising sea levels?
Extend and Pretend
The official response to the 2008 crisis was a policy of ‘extend and pretend’, whereby authorities chose to ignore the underlying problem, cover it up, or devise deferral strategies to ‘kick the can down the road’. The assumption was that government spending, lower interest rates, and the supply of liquidity or cash to money markets would create growth. It would also increase inflation to help reduce the level of debt, by decreasing its value.
It was the grifter’s long con, a confidence trick with a potentially large payoff but difficult to pull off. Houses prices and stock markets have risen, but growth, employment, income and investment have barely recovered to pre-crisis levels in most advanced economies. Inflation for the most part remains stubbornly low.
In countries that have ‘recovered’, financial markets are, in many cases, at or above pre-crisis prices. But conditions in the real economy have not returned to normal. Must-have latest electronic gadgets cannot obscure the fact that living standards for most people are stagnant. Job insecurity has risen. Wages are static, where they are not falling. Accepted perquisites of life in developed countries, such as education, houses, health services, aged care, savings and retirement, are increasingly unattainable.
In more severely affected countries, conditions are worse. Despite talk of a return to growth, the Greek economy has shrunk by a quarter. Spending by Greeks has fallen by 40 percent, reflecting reduced wages and pensions. Reported unemployment is 26 percent of the labour force. Youth unemployment is over 50 percent. One commentator observed that the government could save money on education, as it was unnecessary to prepare people for jobs that did not exist.
Future generations may have fewer opportunities and lower living standards than their parents. A 2013 Pew Research Centre survey conducted in thirty-nine countries asked whether people believed that their children would enjoy better living standards: 33 percent of Americans believed so, as did 28 percent of Germans, 17 percent of British and 14 percent of Italians. Just 9 percent of French people thought their children would be better off than previous generations.
The Deadly Cure
Authorities have been increasingly forced to resort to untested policies including QE forever and negative interest rates. It was an attempt to buy time, to let economies achieve a self-sustaining recovery, as they had done before. Unfortunately the policies have not succeeded. The expensively purchased time has been wasted. The necessary changes have not been made.
There are toxic side effects. Global debt has increased, not decreased, in response to low rates and government spending. Banks, considered dangerously large after the events of 2008, have increased in size and market power since then. In the US the six largest banks now control nearly 70 percent of all the assets in the US financial system, having increased their share by around 40 percent.
Individual countries have sought to export their troubles, abandoning international cooperation for beggar-thy-neighbour strategies. Destructive retaliation, in the form of tit-for-tat interest rate cuts, currency wars, and restrictions on trade, limits the ability of any nation to gain a decisive advantage.
The policies have also set the stage for a new financial crisis. Easy money has artificially boosted prices of financial assets beyond their real value. A significant amount of this capital has flowed into and destabilised emerging markets. Addicted to government and central bank support, the world economy may not be able to survive without low rates and excessive liquidity.
Authorities increasingly find themselves trapped, with little room for manoeuvre and unable to discontinue support for the economy. Central bankers know, even if they are unwilling to publicly acknowledge it, that their tools are inadequate or exhausted, now possessing the potency of shamanic rain dances. More than two decades of trying similar measures in Japan highlight their ineffectiveness in avoiding stagnation.
Heart of the Matter
Conscious that the social compact requires growth and prosperity, politicians, irrespective of ideology, are unwilling to openly discuss the real issues. They claim crisis fatigue, arguing that the problems are too far into the future to require immediate action. Fearing electoral oblivion, they have succumbed to populist demands for faux certainty and placebo policies. But in so doing they are merely piling up the problems.
Policymakers interrogate their models and torture data, failing to grasp that ‘many of the things you can count don’t count [while] many of the things you can’t count really count’. The possibility of a historical shift does not inform current thinking.
It is not in the interest of bankers and financial advisers to tell their clients about the real outlook. Bad news is bad for business. The media and commentariat, for the most part, accentuate the positive. Facts, they argue, are too depressing. The priority is to maintain the appearance of normality, to engender confidence.
Ordinary people refuse to acknowledge that maybe you cannot have it all. But there is increasingly a visceral unease about the present and a fear of the future. Everyone senses that the ultimate cost of the inevitable adjustments will be large. It is not simply the threat of economic hardship; it is fear of a loss of dignity and pride. It is a pervasive sense of powerlessness.
For the moment, the world hopes for the best of times but is afraid of the worst. People everywhere resemble Dory, the Royal Blue Tang fish in the animated film Finding Nemo. Suffering from short-term memory loss, she just tells herself to keep on swimming. Her direction is entirely random and without purpose.
Reckoning Postponed
The world has postponed, indefinitely, dealing decisively with the challenges, choosing instead to risk stagnation or collapse. But reality cannot be deferred forever. Kicking the can down the road only shifts the responsibility for dealing with it onto others, especially future generations.
A slow, controlled correction of the financial, economic, resource and environmental excesses now would be serious but manageable. If changes are not made, then the forced correction will be dramatic and violent, with unknown consequences.
During the last half-century each successive economic crisis has increased in severity, requiring progressively larger measures to ameliorate its effects. Over time, the policies have distorted the economy. The effectiveness of instruments has diminished. With public finances weakened and interest rates at historic lows, there is now little room for manoeuvre. Geo-political risks have risen. Trust and faith in institutions and policy makers has weakened.
Economic problems are feeding social and political discontent, opening the way for extremism. In the Great Depression the fear and disaffection of ordinary people who had lost their jobs and savings gave rise to fascism. Writing of the period, historian A.J.P. Taylor noted: ‘[the] middle class, everywhere the pillar of stability and respectability . . . was now utterly destroyed . . . they became resentful . . . violent and irresponsible . . . ready to follow the first demagogic saviour . . .’
The new crisis that is now approaching or may already be with us will be like a virulent infection attacking a body whose immune system is already compromised.
As Robert Louis Stevenson knew, sooner or later we all have to sit down to a banquet of consequences.
- What The Big Short Can Teach You About Investing
By Chris at www.CapitalistExploits.at
My kids have the mental age of ten and eleven year olds, because, well, they are ten and eleven years old!
So, they fight pretty much constantly. For example: when my son wants past his sister in the hallway and she’s “in the way,” he hasn’t yet formulated the reasoning to wait for her to move, and instead shoves past, sending her into the wall. She, not having developed a cogent argument why this shouldn’t take place, whacks him.
Hard at work here are primal responses. Engaging the most developed part of our brain, the neocortex, which reasons and solves problems, isn’t happening in that example.
Primal instinctive responses are the most common responses since they require almost no thought process. For instance:
- Man sees lion running at him. Man runs away.
- Man sees neighbor with new Porsche. Man wants it.
- Man sees pretty girl in bar. Man wants to get frisky.
- Man sees stock market going up. Man feels good, buys more.
- Man sees stock market going down. Man feels pain. Man sells.
The reason that asymmetry exists in the world is, I believe, in no small part due to the fact that the overwhelming majority of people operate purely at an instinctive, primal level.
This asymmetry is representative in the distribution of wealth globally. The 80/20 law otherwise known as the Pareto Principle (or Pareto’s Law) remains pretty darn constant across time, and geographies. It exhibits itself in both nature as well as human endeavors.
The easiest and fastest fortunes made in the world have been closely tied to this phenomenon.
Case Study
A few weeks ago I did what I only ever do on airplanes – I watched a movie;
The Big Short. It is based on the book by Michael Lewis, which in turn is based on the story of the guys that identified anomalies in the credit default swap market and bet against the CDO bubble.
The story provides yet another (brilliant) example of the Pareto Principle.
Consider the reasoned, thoughtful, and decidedly non-primitive (despite his musical tastes) Dr. Michael Burry. Dr. Burry, unlike the overwhelming majority of his fellow primates realised that 1 and 1 could not equal 4 squared, even if it did have a ratings agency “bow and ribbon” on it.
The overwhelming majority of the investing populace, on the other hand, hadn’t thought much about it at all. As with most things that are entirely unreasonable but ultimately accepted, the US housing boom began with sound fundamentals. Securitizing assets and selling them is what Wall Street does. In this instance Wall Street did just that. They packaged up mortgages into bundles and flogged them to pension funds, mutual funds and various other (mindless) investors. Don’t get me wrong.
Securitizing mortgages isn’t a bad thing per se. Liquidity is increased, and capital can flow more easily between buyers and sellers.
The problem arose with what to do with the mortgages that were subprime or crap. No worries; the CDO squared solved this problem. Just take all the garbage that nobody wants, repackage it into new CDOs which, once blessed by rating agencies, looked just like the original “prime” CDOs, and voila. The institutions, engaging their primal brain, bought them without bothering to look inside.
In the end both the debt and the equity landed up being worthless. Garbage is garbage no matter how you dress it up.
Now, none of the above should be news to you at this point, as it’s been the focus of public debate for the last 8 years.
Dr. Burry (and the guys that followed him into the trade) made out like a bandit not because he shorted garbage, but because he shorted garbage which was mis-priced.
Just as my kids will thump each other instead of thinking through a reasoned response, the majority of the market will react to situations with a primal brain, failing to think things through. The adult mind using only primal instincts is no different from my kids doing same; actually, it’s likely worse.
Furthermore, when asymmetry presents itself as it did to Dr. Burry, it’s human nature to seek solace in the opinions of others who may share the view. You’ll almost assuredly fail to find it. Being social creatures, it’s only human to look for kindred spirits. Being alone is not a natural tendency. Hermits are not the norm.
There are a couple of notable takeaways from the film…
Firstly, Dr. Burry and a number of other players identified not only the fraud, but the mis-pricing of risk, which presented such asymmetry. This is of course how 489.3% returns (the return generated by Dr. Burry’s firm Scion Capital between November 2000 and June 2008) are achieved.
The other takeaway is that the bankers involved should all have landed up in jumpsuits, allowed out of their cells only for a moments man-love in the showers. They of course didn’t, and instead paid themselves billions in bonuses, but that’s another story.
This is how the world works. And so it’s better to look where the 20% of the market has the highest probability of paying you 80% of the returns. Hint: it’s found where asymmetry lies.
In no particular order of preference, right now we are researching and interested in:
- Sovereign debt: What feels like a lifetime of central bank intervention has created a debt burden of proportions never experienced before. As we near the end of the debt supercycle this remains one of the most compelling areas for us.
- Currencies: Short yen and remnimbi. Long US dollar as the USD carry trade unwinds.
- Decimated resource markets: In particular uranium, precious metals, copper and zinc.
- Artificial intelligence: Automation of knowledge work.
- Synthetic biology: Gene sequencing is really coming into its own.
- Blockchain: I’ve previously spoken about this here, here and also in our Bitcoin and blockchain report.
- Robotics: Exoskeletons, remote physical manipulations, manufacturing, healthcare and surgery, and of course basic chores and activities such as food preparation.
- 3D printing: I’ll need an entire report (or 5) to cover this one. It’s coming and fast.
- Iran: Yes, Iran.
You’ll notice that exactly NONE of these fit into “standard portfolio construction.” You’ll probably also notice that there is ZERO interest in mutual funds, indexing, or any of the nonsense preached to us in four-walled institutions comically referred to as “higher education.” The 80% can gladly have all that.
If you, like us, are focused on harnessing the power of the 20%, then make sure not to miss out on our future articles on the topic.
– Chris
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- Citi: "There Was Something About The Entire Recovery Narrative That Is Downright Wrong"
Yesterday, we laid out what according to Citi’s Matt King, one of the most insightful and respected credit analysts in the world, is most surprising about the ongoing market selloff: the odd interplay between some asset classes which are declining in an orderly, almost boring fashion, and other assets which have crossed into and beyond a state of existential panic.
The reason for this ongoing paradox is still unclear but as Citi’s King, BofA’s Martin and Hartnett, and DB’s Konstam and Reid have all hinted on numerous occasions, the fundamental driver of everything that is wrong with the market are the actions of the policy makers themselves, who in their feverish attempt to preserve the market in the post-Lehman devastation, have made the market into a “market”, one where nothing makes sense any more. In other words, in order to save the market, central bankers broke it.
Which brings us to the conclusion from Matt King’s most recent note, one which picks up on his observations of the all too clear dislocations and paradoxes in the market, those “things which, according to all the policymakers’ models of the world, are “not supposed to be happening”.
And yet they are, and as King adds, “it is increasingly clear that the world is not fixed – far from it.”
The rest of King’s conclusion is a must read for everyone, especially those who think that anything in the past 7 years has been fixed, or even partially resolved.
This, then, is the real implication of widespread market dislocations. It suggests that there was something about the entire narrative peddled after the crisis which was at best incomplete, and at worst downright wrong. As an FT article put it, either for the emerging markets, or indeed for what is rapidly becoming a much more broad-based sell-off, “There is no obvious high conspiracy between banks, the rating agencies and the government”. Nor is there simply a risk we might need to respond to “future adverse shocks”, as Yellen’s testimony to Congress yesterday maintains.
If the pre-crisis problem was not CDOs in and of themselves, or excessive bank lending and leverage, it must have been something else. The most obvious candidate is overly easy monetary policy stimulating unsustainable credit expansion and ultimately asset price bubbles. Banks were certainly an instrument through which this policy was enacted, but financial leverage itself – especially that behind relatively low-risk arbitrages within financial markets – was a very limited part of it. Had leverage not been available, easy money would have taken effect some other way, either by spreading to other banking systems which were less constrained, or through stimulating an expansion of credit via bond markets instead. The years since the crisis have of course seen both.
Which brings us to King at his most apocryphal.
Far from making the world safer, then, there is a risk that the post-crisis policy mix has simply suppressed problems, making markets stickier, and may even have added to them, by driving the global credit cycle far ahead of the current interest rate cycle. Recent market dislocations are a sign that that stickiness may be reaching breaking point. In the past, aggressive easing of monetary policy provided the solution to almost all recent crises – both those which did not lead to recessions, such as 1998 and 2011, and those which did, such as the tech bubble of 2000 and the real estate bubble of 2007-8. At this point we may start to question whether it can provide a similar solution this time round, not just because of the zero lower bound, but because the entire premise on which it has been based – inducing credit expansion and risk-taking in some other part of the global economy – seems to be reaching its limits.
In the property market, agents like to say that location is everything. When it comes to fixing current problems we are tempted to resort to the apocryphal story of the response given to tourists in Ireland when asking the way to Dublin: “If I were you, I wouldn’t start from here.”
Alas, 7 years into the fake “recovery” the option of “starting from some other place” is long gone.
- The Negative Mortgage Rate Program
Submitted by Ramsey Su via Acting-Man.com,
Something Needs to be Done – A Glimpse of the Future
In the summer of 2016, US and global economic growth rates are nowhere close to estimates. In fact, a global recession, or worse, is imminent. At home, student loan defaults are now close to 100%. The unemployment rate is climbing, as minimum wage workers finally realize that the financial pain of working or not working is identical. In Euro-land, as the weather warms up, the never-ending flotillas from Northern Africa resume swamping the Southern shores.
A black hole opens up in the world of centrally planned money
By now, the Treasury has long given up on the idea of privatizing the agencies. Freddie and Fannie will soon be part of HUD, surviving for the sole purpose of providing affordable housing for all – whatever that is supposed to mean. Policymakers have determined that the real estate market is stalling. Desperate times require desperate measures. Something needs to be done.
After an intense pow-wow between the administration, Congressional leaders and the Federal Reserve, the Negative Mortgage Rate Program (NMRP) is born. The program is simple. Homeowners will be paid to borrow. The Federal Reserve declares that the NMRP is a brilliant extension of NIRP (negative interest rate policy), because it will benefit everyone, not just the 1%ers.
A good reason to break into song…
Here is how it works:
No downpayment needed. 100% financing.
No payments needed. This is the reverse of the negative amortization loans during the subprime era. In other words, it is a negative negative amortization, or neg-neg-am loan. The loan balance will decrease instead of increase.
No need for mortgage insurance since, with no payments, there can be no defaults.
No qualifying needed, hence removing the entire cumbersome loan application process.
Say you borrow $100,000 at -1% interest. Here is the math:
Your interest cost will be -$1,000 per year. In other words, your loan balance will be $99,000, if you make no payments at all.
Using a commonly accepted 30 year term, the loan balance at the end of 30 years would be around $50,000, all without the borrower having to pay a dime in mortgage expense.
In fact, instead of charging around 4% for a mortgage, reverse that to -4% interest. In 30 years, the mortgage will be totally extinguished.
Freddie and Fannie will originate these loans, package them as neg-neg-am-MBS and sell them all to the Federal Reserve. Housing recovers overnight and the Feds declare “mission accomplished.”
What can possibly go wrong? It’s free money!
Get Out the Straight Jackets
Before you call me nuts, this is actually already reality. The governments of Germany, Switzerland, Japan and others are charging savers for the privilege of lending them money. Why stop there? Let the people enjoy negative interest rates when they buy a house, or a car, or borrow for a college education. In fact, why bother with taxes. Just let the government borrow to operate. The more it borrows, the more it makes.
Germany’s 2-year note yield has been negative since the summer of 2014 – currently it is at a new low of minus 50 basis points – click to enlarge.
Watching Ms. Yellen answer questions during the “Humphrey-Hawkins” testimony the last two days was painful. It is time to put the central bankers of the world in straight jackets and throw them into the cuckoo’s nest where they belong.
Get Out the Straight Jackets – This heavy duty model might even hold Draghi!
- Heads You Lose, Tails You Lose
Vote accordingly…
Source: @RamirezToons
- A Bubble Induced Economy & The Wage Gap
Submitted by Leonard Brecken via OilPrice.com,
During the 1990s, developing nations including Mexico and many in Asia became very competitive manufacturing bases due to lower wage structures. This, I believe, was the root cause of the use of failed fiscal and monetary policy to “close the gap” with the competitiveness of low-cost wage structures around the world, which has played out for three decades. The result has been three bubbles and a worsening systemic problem of wage and taxation disparity between the U.S. and developing nations.
In addition, an immigration explosion has occurred in part tied to big business’ desire to use foreign-born lower wage earners to fill the so called “wage gap”. Then policy followed to accommodate this desire. U.S. corporations in the 1990s accelerated outsourcing manufacturing to nations such as China and Mexico to temporarily solve the wage dilemma.
The chart below shows that wages, adjusted for inflation, have been steadily declining for decades. This illustrates the systemic problem we have as a nation. Wages have increased and decreased along with the vagaries of economic cycles, but they have steadily made lower highs and lower lows. Instead of responding with traditional methods of lower taxation to compete in the global marketplace, the government has chosen to keep taxation high relative to other countries, even while other countries lowered taxation. That made the wage disparity problem, and U.S. economic competitiveness, worse.
Source: Zerohedge
The labor participation rate turned down almost exactly when wages peaked in the late 1980s. This reinforces the fact that the labor problem was growing at the same time that immigration accelerated. Yes, baby boomers have impacted the rate as they aged and left labor force, but it’s no coincidence that the rate peaked coincidentally with wages. Many left the workforce simply as result of not being able to find a high-wage job, concluding that it is not worth it.
Source: Zerohedge
With a shortage of high-wage jobs, many are substituting lower-paying jobs, as well as the chart below clearly depicts:
Moreover, to artificially boost GDP, the U.S. turned to debt (public and private) and easy monetary policy (which enabled more debt), but as the chart above shows it failed to address Americas wage competitiveness.
Source: Federal Reserve
(Click to enlarge)
Even after decades of low interest rates that has encouraged mountains of debt, the end result will likely be a deep recession unless structural changes in taxation and regulation occur. The use of both debt and artificially low interest rates only temporarily fills the gap.
Furthermore, both have consequences eventually when the debt comes due, as growth can no longer support it. Asset bubbles are the other consequence, or in economic terms, “mis-allocation of capital.”
However, lowering taxes permanently could help alter the long-term structural problems. As U.S. government debt eclipses $19 trillion, it is clear that its use of debt to artificially prop up the U.S. economy has not solved anything.
Source: Gov’t Data
Debt is a temporary stop gap measure for politicians to kick the problem to a new generation. As the chart on wages show, all the new debt has done very little to rescue three decades of falling wages.
We are bumping up against the limits of both fiscal and monetary policy. And financial markets are just now realizing this. Easy money is only enabling the debt binge as the problem has only grown since the last crisis of 2008-2009, as yet another crisis may be beginning.
Lastly, many investors are finding market volatility extreme driving many from participating. If one was to measure investor participation rates like labor you would find a steadily declining one as algorithm driven trading grows. This is not a healthy trend either. Would you go to a casino & lay bets knowing the house has unlimited chips to out bet you? That is exactly what’s going on with stock market, systemic to easy money fed policy. Price swings as a result of algorithm trading in order to "stop" investors are not tied to fundamentals but unlimited capital & headlines. The investment field is changing forever like the economy and it isn’t good for the all but the very large investor.
- The Global Fixed-Income "Blood Map" Of 2016
For credit investors, 2015 was bad a year (for energy bonds it may have been the worst on record) culminating with the gating and liquidation of several credit-focused mutual and hedge funds.
However, judging by these heatmaps, 2016 is shaping up to be even worse.
The first chart below from Bank of America shows a YTD performance heatmap of all Global fixed-income performance. The variation in performance remains vast, but with plenty of areas still of “credit stress.” The one sector that is clearly working – for now – is sovereigns on the back of even more NIRP around the globe and $6 trillion in govvies trading with negative rates.
Unfortunately, for most other credit investors it has already been an miserable year, as the following Citi heatmap of YTD junk bond prices demonstrates.
But while junk is clearly a sea of red, what is most surprising is that in 2016 the worst performing sector on a relative basis is not high yield but US and European investment grade, as the contagion from HY spills over ever higher in the capital structure.
Behold: the US & Europe investment grade CDS blood map.
And here is the same for the entire world’s IG CDS:
This is what Bank of America’s Barnaby Martin says about this spillover:
We argued in late Jan that “stressed” high-grade names were trading very wide relative to the rest of the pack, and that this would make low-beta credits appear overvalued, leaving them at risk of repricing wider – in a kind of domino effect. We still see this as a big risk in IG and urge caution on low-beta credits.
For some IG investors it may already be too late. But before you dump those investment grade bonds and rush in junk on hopes the revulsion is over, read the following from another BofA analyst, Michael Contopoulos.
Couple a declining services sector with a manufacturing sector that is already in a recession and a declining global economy, and we continue to think high yield markets have substantially more downside ahead of them; particularly as non-commodity defaults pickup later this year.
Perhaps our greatest concern is that if we are correct on the fate of the high yield market and the broader US economy, the Fed has very little effective tools to combat such a scenario. With the fed funds rate at only 25bps and the Fed unsure if they are even allowed to implement negative rates from a legal standpoint, the only other tested instrument is a 4th round of quantitative easing. Except as we have seen in past QE rounds, the effects of repeated monetary stimulus have diminishing returns. Since Draghi applied the latest round of easing in Europe, volatility has actually increased. To this end we believe the path the Fed ultimately pursues is irrelevant to the credit market. In fact, we believe further stimulus would not calm the volatility in risk assets and may actually add to it as an acknowledgement of a worsening macro environment likely causes risk managers to dictate a dumping of securities and a hoarding of cash.
Yikes.
Source: Citi, Bank of America
- Why Yellen's Testimony Screamed Danger
Federal Reserve Chair Janet Yellen gave her bi-annual Humphrey-Hawkins testimony before congress this past week. Although the prepared remarks were much the same as expected with any monetary policy review. What really made “news” to anyone paying attention was the Q&A. Yes, may times Ms. Yellen seemed to give the usual rebuttals of “We would consider this if that …” and so forth.
Yet, in response to questions that took issue with the Fed. paying banks on excess reserves The Chair seemed not only defensive, but rather perplexed, as to why they were even questioning it to begin with. This line of questioning in my view opened up, and brought to light, the Pandora’s box of Keynesian insight and thought processes now emanating from the Fed. In fact, I’m quite sure Ms. Yellen herself didn’t realize just how far she threw the lid open.
However, there was one exchange where not only the answer was revealing. It was the tenor and tone that was not only jaw dropping, rather, it sent shivers. Forget about the old “behind the curtain” analogies. This one is far more troubling not only to business and free markets, but rather: the very fabric of what free enterprise is, and possibly capitalism itself.
Yes, I’m well aware it’s conjecture bordering on fire and brimstone. However, if you make/made your living based on your ability to both ascertain information, as well as, understand its implications by what someone is saying and/or doing, along with the manner in which they are being done, you can’t help but to see things others miss. (e.g., as I’m quoted to say: “You grow in business when your knowledge of product gets replaced by your knowledge of people.”)
From what I’ve garnered having read, watched, or heard from the financial press as of this writing. It seems few caught, or understood, its implication. So what is this exchange or statement that sent me into “The end is nigh!” bewilderment? Fair enough…
In response to push-back as it pertained to paying banks interest on reserves and it efficacy, as well as whether or not there may also be some unfair advantages vis-à-vis where banks are receiving slightly more of a payment than the stated interest rate implies. The Chair argued from what I construed as a far more defensive argument and posture to the program, rather – than merits based. It’s not a distinction without a difference.
And what clinched this assumption to the affirmative, in my opinion, was another part of her defense as to warrant its efficacy. That defense? I’m paraphrasing: “The Federal Reserve has gone from remitting to the Treasury a few $Billion dollars a year to now over $100 BILLION which helps fund the government itself.” i.e., You want to blow a hole in your budget of $100 Billion? Are you hearing me? Hello?!
I strongly suggest one would be prudent to find that Q&A on their platform of choice and view, read, or listen too it for themselves, rather, than just take my word for it. I feel it’s that important.
So what’s so wrong with that one might ask, “The Fed. is paying the Treasury money it’s making from all the bonds and sorts they have on their books. What’s wrong with that?” From my viewpoint: everything. Here’s why…
Regardless of what any so-called “smart crowd” financial aficionado will state. There is one – and only one – construct that keeps what the world deems “monetary policy” afloat: The belief in confidence. Only “the belief” part is what keeps it all together. i.e., What you or I believe to be money, and what its worth today. Period.
Today the world is awash in fiat based currencies. Debt, is priced in fiat based currencies. And, political wealth and power is also based on it. Change “belief” into “assumption” even ever so slightly – and everything you once thought of on how the world works is thrown into the trash pile along side most, if not all, fiat anything. Believe me.
This is the “fire” the Fed. is playing with. For it’s not lost on anyone (“anyone” also includes other governments) who understands business and free markets that the $100 Billion remitted to the Treasury was made possible by the Fed. creating that money ex nihilo. Arguing or using it as a shield to deflect criticism, as well as, implying the benefit for such actions opens the Pandora’s box of just how far off the ranch of sound monetary policy we’ve now come. (“we’ve” meaning the U.S. once considered the “gold” standard of monetary prudence.)
To use the term uber-Keynesian as to describe this rationale is an understatement. Now, not only does the Fed. seem open to, but also, apparently willing and/or eager to pursue going “Full-Krugman” as to facilitate – a negative interest rate policy agenda. Even if, “Currently they’re not sure if they have the authority.” But, (and it’s a very big but) “don’t know of any restriction as to why they can’t.” i.e., Again, if one reads between the lines one may prudently infer: They’ll seek forgiveness, as opposed to seeking permission, first.
So why is this so dangerous? Well, let’s look at the big picture and rationale as I see it for context…
As for the efficacy, as well as, the defending of those increases in payments to the Treasury. One has to argue (or assume) that this is not some form of a “tax” on the economy as a whole.
The reasoning is this: If the banks don’t (or won’t) lend it out for whatever the reasons, that’s money being rewarded (reward meaning it’s making money through interest payments via the Fed.) for sitting on balance sheets rather than working its way into the general economy via loans and such where the multiplier, as well velocity effects, can take shape.
In effect the Fed. is “taxing” the overall economy by making that money “safer” on a banks balance sheet as opposed to moving the banks back into the risk business (e.g. loan making business) where they say they want the banks to be in the first place. And when you’re talking about $Trillions deposited on the Fed’s books. Suddenly that tiny accrued interest payment adds up to truly big bucks.
One could further argue (and I’m of this mindset) that this, along with, the exploded $4 TRILLION balance sheet of the Fed is a fair representation of comparative cumulative figures on just how much potential productive capital the Fed. has unwittingly siphoned out from the economy today. And, in conjunction, pulled forward from future potential of the overall economy. That’s how (or why) I argue the “tax” argument as opposed to the “rewarding” type view-point the Fed. seems to be embracing.
Remember, most (if not all) of the Fed’s balance sheet is made up of bonds. (this is the key point) So, as the Fed. bought and continues to “re-invest” they alleviate the needed fiscal pressure away from lawmakers to make needed policy changes whether it be taxation, or other business incentivizing laws. All while the Fed. itself argues “The Fed. can’t do it all.”
This process no matter how it’s argued as “beneficial” fosters and facilitates negative affects into the business mindset where examples of crony capitalism, as well as, other economic disabilities and/or hindrances manifest in ways far too numerous to list here.
Currently, many (including the Fed.) are arguing current monetary policy and economic malaise as some chicken and egg quandary. This arguing of such a quandary I’d like to point out is not only manufactured, but rather, is now running in near perpetuity – by the Fed. itself. A quandary I’ll again remind those arguing such nonsense only a few years ago was argued by the very same as “preposterous” to even consider. (e.g., monetizing the debt argument) Now it’s morphed into, “Look how much money you’re making with it!.” This chicken and egg quandary takes monetary gene splicing to a whole new level in my opinion.
Understanding this one point is a lesson in uber-Keynesian (or Full-Krugman) economics 101. And, it tells you almost everything you need to know about what’s wrong with the economy in general and why more tinkering won’t help. But wait, I’m sorry too say – it gets worse.
As bad as the above sounds, the reason why it gets worse is this: All of the above is made manifest via the Fed. with money created ex nihilo. Why does that matter you ask? Simple…
Just as I made the argument where the “preposterous” has now morphed into “prudent monetary policy.” So too is that other “Full-Krugman” idea which is not only being contemplated as possible, but now, seems near inevitable: Negative Interest Rates. e.g. NIRP – the ultimate tool in Pandora’s box of monetary policy.
Why is NIRP the equivalent of a Pandora’s box filled with fire and brimstone? It’s for this one simple difference that’s being lost on everyone who claims to be a member of the so-called “smart crowd.” NIRP doesn’t just effect the banks or is some obscure construct for efficacy within the world of economic theory. No, it sets a much more meaningful, as well as, dangerous precedent. Here’s how I see and sum it up. To wit:
Via an incontestable dictate or decree; It (e.g., The Federal Reserve) will directly impose a “tax” and implement the collection of that “tax” on money held directly by the U.S. citizenry without their consent or approval by means of an un-elected supposedly “non government” independent agency. In other words: unless you put it under your mattress or spend it – you’ll be fined a “tax” anywhere throughout the banking system. Period.
Does anyone else but me see the inherent dangerous consequences just lying within this “Negative rates might be just the thing we now need here in the U.S.!” based argument? I’ll contend it may just be the thing to make even Pandora herself more nervous.
Unlike the overall assumptions when talking about Fed. fund rates, or balance sheet and interest payments. Those arguments reside in some monetary construct which is foreign to most people. i.e., “That all effects someone else like banks and businesses – not me” type of mindset.
NIRP in the United States is a-whole-nother matter entirely.
This is because NIRP directly touches the money markets. Yes, those very same money markets that hold many a 401K holders cash, certain checking accounts, savings, and a whole lot more. Not to mention what they hold in lines of readily needed access capital for many a businesses daily operational funding.
I can not stress the implications for the disruption of mindset of not only people in general, but rather, businesses of all sizes and stripes if money can be penalized – for just being. (i.e., you’ll be not only charged but it will automatically be deducted from your balances)
You think this is just some “Hey sounds like we should try that NIRP thing here!” no-brainer that should be enacted willy-nilly as “just another tool in the monetary policy box” based argument when thought through more clearly as to the implications or ramifications in the U.S.?
However, if one listens for such warnings – the silence has been breathtaking. And the Keynesian’s of the world are acting and arguing as if there should be “no big concern.” After all, the question is framed as “Plus 25 basis points or minus (e.g. negative) 25. What’s the big deal?”
Well, here’s what “The big deal” is: One policy (e.g., paying on reserves) is what could be described as a “closed” loop. (i.e., just affects the banks) Whether good or bad is a different argument. However: touch the money markets in an adverse way such as “taxing” it as proposed via NIRP? Excuse me – Is that Pandora I see? And what is that box she’s carrying with the lid open? Is she bringing a gift?
Again, people will point to the EU and say “Look they’re doing it there what’s the big deal?” Yet, they fail to look (or comprehend) at just how quickly everything about the EU is now coming unglued. The current policies of the ECB along with Mario Draghi’s “whatever it takes” initiatives are failing almost as fast as they are being tested. And, if anyone thinks the EU along with current ECB policies are doing “just swell?” I have some wonderful oceanfront property in Kentucky you can turn your dollars into hard assents before the crash. Trust me, the price will be right!
If the Fed. does indeed consider, then implement, a NIRP policy – the backlash and fallout will be devastating to not only businesses that need a well-functioning money market and payment clearing system. But rather, to the citizenry as a whole that relies on those business not just for gadgets and trinkets. But; for the very sustenance of everyday essentials like food at the market, gas at the stations, heating fuels for the home, and a whole lot more.
What has been lost (and not fully understood by many more) is the real crisis that occurred when everything was about to come off the rails during the financial crisis in ’08. It was when the money markets “broke the buck.” Until then the crisis was much more of a financial spectacle on Wall Street for the average person. However, when the money markets came under pressure and showed signs of melt down? That’s when “all bets were off” type arguments and reasoning became manifest.
And, this onslaught of panic was just as intense throughout the business community when payments that were always assumed and needed to clear the banks were anything but. Remember: If the farmer/rancher can’t trust the packing house checks to clear – they’ll be no food going to market. A disruption of only a week can send a rippling effect many have little understanding of.
If businesses suddenly infer that they can not get paid accordingly or properly – it grinds to an absolute halt, where disruptions of supplies and far more can cause not only panic, but also, a complete breakdown in society. Think I’m off base?
Watch how fast any metropolis or big city morphs into Mad Max styled overtones if the food supply chain that supplies grocery stores breaks down or grinds to a halt. Having spent my early career in the food business I can state with confidence the much touted “3 days supply within any supermarket” is not only accurate, it’s a best case scenario when folded over any potential “normal” emergency many have experienced such as a blizzard or blackout. Then your lucky if essentials last 24hrs.
And here we are only 8 years since and one can’t help but think not only does Wall Street and others have a short memory, but rather – the Fed. itself.
If you want clues on just how awry, as well as quickly, things have the potential for unraveling just look to Japan today, and what’s taken place over the last 2 weeks since in the wisdom of the Bank of Japan’s governor Haruhiko Kuroda unleashed NIRP to a stunned market only weeks after saying such a move – was not even being considered.
Suddenly Japan’s stock market is looking and acting in reminiscent fashion mirroring 2008. In a matter of weeks the Nikkei™ is down from just above 20,000 to now 15K and change while briefly breaking that level to test one with a 14 handle. One doesn’t need advanced math skills to comprehend shedding some 25% of its value at any given time (let alone weeks) does not bode well for an economy. Especially when that NIRP policy directly affects the number one carry trade currency in the world. (And I haven’t even mentioned China)
Yet, we’re told cavalierly there’s really “no reason for concern” here. After all, we’re only talking about the impacts that could arise in the worlds most dominant, as well as, bench-marked currency in the world: The $Dollar. Besides, (we’re told) we should take the utmost comfort in the fact the Fed. knows exactly what it’s doing.
If that’s all true I just have one thing to ask:
You mean just like they were some 30 days ago when Ms. Yellen all but touted a banner stating “Mission Accomplished” at the last FOMC presser where she delightedly stated they were finally raising interest rates after so many years, for the economy had improved to such levels where it proved receptive to it? Only to be surprised weeks later amidst a maelstrom of global financial selloffs and upheavals in stunning speeds to now move Wall Street consensus as to cut all expectations of any future rate hike this year, where describing what was only weeks ago as “baked in” (i.e., 4 more hikes) as now “ludicrous?” All the while breathlessly needing to explain (or plead) in great detail why the Fed. is (or should) currently explore options of not only reversing, but rather, going below the zero bound – and into negative territory.
All that comes to mind is that famous quote from Alfred E. Neuman…
“What, Me Worry?”
I wish I were trying to be funny.
- Don't Blame China For Market Insanity… Says China
When it comes to geopolitics, all anyone wants to talk about is Syria. And understandably so.
When it comes to financial markets, all anyone wants to talk about is China – an equally understandable fixation.
To be sure, China was already a big driver of risk on/ risk off sentiment going into August of 2015. The “is it a hard landing or is it not” question very often dominated global macro discussions among those who enjoy debating such things.
But when Beijing moved to a new FX regime on August 11, China was thrust into the spotlight. The “surprise” devaluation of the yuan plunged global markets into chaos, triggering “Black Monday” on August 24th and precipitating a massive drawdown of the country’s FX reserves which accelerated the global trend towards “quantitative tightening” (to quote Deutsche Bank).
In the new year, developments in China are unquestionably driving markets. A comically absurd attempt to implement a stock market circuit breaker triggered a series of harrowing declines early last month that set the tone for what turned out to be one of the worst Januarys in market history.
Meanwhile, nearly everyone suspects that a much larger yuan devaluation is in the cards. Kyle Bass, for instance, sees the RMB depreciating by 30-40% as Beijing struggles to recap a banking sector that’s soon to find itseld beset with NPLs.
George Soros shares this view. At Davos, the aging billionaire said his money is on a Chinese hard landing and as such, he’s betting against Asian currencies.
That declaration set off a wave of hilariously absurd Op-Ed’s from the captive Chinese media which the Politburo uses to deflect criticism and lambast foreign “speculators.”
On Sunday, we got the latest “opinion” piece out of China, this time from Xinhua which wants you to know that when it comes to finding a scapegoat for market turmoil, you shouldn’t look east.
Also, about Beijing’s FX reserves – which are of course the single most important number for markets and are a proxy for how much money is fleeing the country- “capital flight” is not the preferred nomenclature. “Outflows” please.
* * *
The global financial markets have suffered sharp declines lately, with stocks plunging across Europe, Japan and the United States last week.
Some players once again tried to link the global rout with China. However, such claims are unwarranted and playing the blame game in the face of challenges is useless.
U.S. Fed Chair Janet Yellen said Wednesday that uncertainties from China, such as the economic growth slowdown and the yuan depreciation, have “led to increased volatility in global financial markets and … exacerbated concerns about the outlook for global growth.”
But as the Chinese equity market was closed for a week during the Chinese New Year, there has been no fresh news from China. Neither did China release any economic data or announce new policies that could move the markets during this period.
Some of the media outlets in the United States carried reports this week on what they described as a “capital flight” from China, despite that the yuan has stabilized against the U.S. dollar recently.
“Once again, financial markets are painting an oversimplified picture of a very complex story,” said Stephen Roach, senior fellow at Yale University’s Jackson Institute of Global Affairs.
Experts have attributed recent market jitters to factors such as the futility of the negative interest rates adopted by Japan, crude oil prices hitting 12-year lows, concerns over the financial strength of European banks and uncertainties over the U.S. Federal Reserve’s monetary policy.
Since the Fed decided to raise interest rates for the first time in nearly a decade last December, worries have been mounting about whether global economic growth has been sound enough to withstand the impact of the initiation of a cycle of monetary tightening.
“Central banks are starting to wean markets from the artificial support of years of unprecedented quantitative easing … that could prove far more problematic than another China scare,” Roach said.
After years of massive monetary easing, some adjustments are inevitable, so “everyone seems to want to find someone else to put the blame on,” China’s central bank governor Zhou Xiaochuan said in a recent interview with Chinese magazine Caixin.
Zhou said that there is no basis for the continual depreciation of the yuan and that “China would not let the market sentiment be dominated by these speculative forces.”
Meanwhile, it is important to differentiate between capital outflow and capital flight. The capital outflow may not be capital flight.
The market has had unrealistic expectation for the stability of the yuan as a result of its being “too stable over the years,” Zhou said.
In terms of the economy, China has been a vital stabilizing power, too. In 2008, when the financial crisis spread from the United States and Europe to the emerging economies, China not only kept its currency from depreciating, but also announced a 4-trillion-yuan stimulus package.
After decades of double-digit growth, China has embarked on a new stage with a relatively slower growth rate of around 7 percent. Experts believe this is a reflection of the structural shift in China from export- and investment-driven growth to more balanced consumption-driven growth.
Such reforms are set to benefit the world once they are completed. China has been an important source of global economic growth, contributing more than a quarter of global economic growth last year.
Difficult external factors have added to the challenges facing China as it tries to push through structural reforms.
Central banks and market regulators of all major economies, especially the developed economies, should focus on boosting investor confidence and supporting growth. They should also be more prudent in introducing major monetary policy changes with potential spillover effects.
* * *
“It really tied the room together”…
- USD JPY Currency Cross Analysis (Video)
By EconMatters
This year financial markets have been in Risk Off mode, and as a result the USD/JPY carry trade has reversed considerably in 2016. Just how low can we go in this reversal? At certain points a market is broken, and fair value considerations go out the window.
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