- Dow Dumps 250Pts, Nikkei Plunges 500Pts After China Credit Concerns, Kuroda Comment
It appears the world is ganging up on The Fed as following China's recent clear and present threat should the USD strengthen, BoJ's Kuroda warned that further QQE might threaten the bank's finances – implicitly demanding moar from Yellen because he knows he's out of bullets. Add to that the surge in China credit which merely extends the life of already zombified firms, thus spreading more deflationary stress to the world and stocks from China (SHCOMP -3%) to US (Dow -280 points from Bullard Bounce highs) are tumbling.
China’s broadest measure of new credit surged the most since June as companies increase borrowing on the corporate bond market, underscoring a shift away from reliance on state-backed banks for funding.
Aggregate financing rose to 1.82 trillion yuan ($276 billion) in December, according to a report from the People’s Bank of China on Friday, compared with the median forecast of 1.15 trillion yuan in a Bloomberg survey.
The data shows companies are turning to alternative sources for credit given banks’ reluctance to lend. It also adds to signs the economy is stabilizing, not slumping as its falling currency and plunging stock market seem to suggest.
"For the whole year of 2015, the biggest increment in aggregate financing came from the corporate financing via bond and stock markets," said Zhou Hao, an economist at Commerzbank AG in Singapore.
"It appears to us commercial banks have few incentives to provide loans directly to corporates, especially due to credit concerns over SMEs, but turn to capital markets to finance the corporate indirectly. This hints an ongoing structural change in China’s financing system."
In fact, as we noted previously, the bigger than expected increase in aggregate financing shows Chinese companies taking advantage of lower (bubble) bond yields to raise funds as commercial banks have refrained from providing loans to domestic companies because of the slow economic growth outlook.
Despite the massive supply, yields have collapsed…
As both "strong"
And "weak" balance sheet firms…
…take advantage of the credit bubble. However, there is one less than silver-lining:
Going by the official numbers, which are widely regarded as understated, bad loans rose to a seven-year high of 1.2 trillion yuan as of the end of September. In a sign of write-offs to come, policy makers are aiming for a clean-up of “zombie companies” that rely on government subsidies and bank loans to keep operating.
While that credit impulse would normally be seen as a positive in the new normal, it appears there has been a clear shift in recognition that enabling already-zombified companies to live longer merely exacerbates the over-invested, over-produced, mal-invested deflationary spiral that is rapidly spreading across the world.
Then Kuroda piled on, noting:
- *KURODA: NO PLANS AT THE MOMENT TO ADD TO MONETARY EASING
- *KURODA: JAPAN'S POTENTIAL GROWTH RATE IS AT OR BELOW 0.5%
- *KURODA: QQE POLICY HAS A RISK FOR BOJ'S FINANCES
Which sounds an aweful lot like a demand that The Fed step back up to the plate and "ease" the world's pain (or at least "un-tighten.")
And crushed Japanese Stocks… (Nikkei down over 500 points from the US session close)
And the result of that is an almost total reversal of all Fed's Bullard's good work during the US session. (Dow down over 250 points from Bullard's Bounce peaks)
So for now, Bullard appears to be firing blanks and "good" news is bad news once again.
Chinese stocks head for their longest weekly losing streak since October…
…and still the worst start to a year ever…
- How Switzerland Hopes To Prevent Refugee Sex Attacks: With This Cartoon
The traditionally inert, neutral and quite homogeneous nation of Switzerland is not used to having cultural integration issues, which is why it has been watching recent events across the German border (and elsewhere in Europe) with sheer terror. And in order to preempt any possible outbreaks of refugee violence against women, or in general, ahead of the Lucerne carnival starting on February 4, Switzerland is getting ready.
According to Blick, the department of Health and Social Services will use the following Austrian cartoon flyer dubbed “Ground Rules” which will be distributed to incoming migrants ahead of the noted Swiss carnival with hopes it will make it clear what is and isn’t permitted. It lays out various instances of accepted behavior such as kissing and praying, while making it clear that punching women and children in the head is frowned upon in polite society.
The flyer was modeled after a comparable one, also created in Austria last year as part of the initial wave of mass refugee influx.
However, concerned that migrants would be less than inclined to read the text, the follow up was populated with “pictograms” or cartoons.
According to Blick, distributing the flyer was a spontaneous decision that took place “after the attacks in Germany on New Year’s Eve” when Swiss authorities received a number of reactions, however they add that it was a preventive measure: “we currently have no problems.”
Blick adds that currently in the canton of Lucerne there are about 1800 asylum seekers in three centers and nine temporary shelters.
As for the flyer, the local government has determined to “focus on role models, and equality between men and women.” They “want to show that there is zero tolerance for sexual harassment. The motto is “If you come to us, abide by our rules.”
A comparable flyer in Germany was found to have fanned racism with explanations such as “young girls feel harassed by demands such as asking for a cell phone number or Facebook contact, or marriage proposals” or “when nature calls we do exclusively on toilets, not in parks and gardens, and not on hedges and behind bushes.”
Whether the cartoons will be successful in taming the refugees’ more base instincts, tune in after the Lucerne carnival has started on February 4 to find out.
- Financial Collapse Leads To War
Submitted by Dmitry Orlov via Club Orlov blog,
[With the new year, a sea change seems to have occurred in the financial markets: instead of “melting up,” the way they used to, they have started “melting down.” My original prediction is that this will lead to more armed conflict. Let's see if I was right.]
Scanning the headlines in the western mainstream press, and then peering behind the one-way mirror to compare that to the actual goings-on, one can't but get the impression that America's propagandists, and all those who follow in their wake, are struggling with all their might to concoct rationales for military action of one sort or another, be it supplying weapons to the largely defunct Ukrainian military, or staging parades of US military hardware and troops in the almost completely Russian town of Narva, in Estonia, a few hundred meters away from the Russian border, or putting US “advisers” in harm's way in parts of Iraq mostly controlled by Islamic militants.
The strenuous efforts to whip up Cold War-like hysteria in the face of an otherwise preoccupied and essentially passive Russia seems out of all proportion to the actual military threat Russia poses. (Yes, volunteers and ammo do filter into Ukraine across the Russian border, but that's about it.) Further south, the efforts to topple the government of Syria by aiding and arming Islamist radicals seem to be backfiring nicely. But that's the pattern, isn't it? What US military involvement in recent memory hasn't resulted in a fiasco? Maybe failure is not just an option, but more of a requirement?
Let's review. Afghanistan, after the longest military campaign in US history, is being handed back to the Taliban. Iraq no longer exists as a sovereign nation, but has fractured into three pieces, one of them controlled by radical Islamists. Egypt has been democratically reformed into a military dictatorship. Libya is a defunct state in the middle of a civil war. The Ukraine will soon be in a similar state; it has been reduced to pauper status in record time—less than a year. A recent government overthrow has caused Yemen to stop being US-friendly. Closer to home, things are going so well in the US-dominated Central American countries of Guatemala, Honduras and El Salvador that they have produced a flood of refugees, all trying to get into the US in the hopes of finding any sort of sanctuary.
Looking at this broad landscape of failure, there are two ways to interpret it. One is that the US officialdom is the most incompetent one imaginable, and can't ever get anything right. But another is that they do not succeed for a distinctly different reason: they don't succeed because results don't matter. You see, if failure were a problem, then there would be some sort of pressure coming from somewhere or other within the establishment, and that pressure to succeed might sporadically give rise to improved performance, leading to at least a few instances of success. But if in fact failure is no problem at all, and if instead there was some sort of pressure to fail, then we would see exactly what we do see.
In fact, a point can be made that it is the limited scope of failure that is the problem. This would explain the recent saber-rattling in the direction of Russia, accusing it of imperial ambitions (Russia is not interested in territorial gains), demonizing Vladimir Putin (who is effective and popular) and behaving provocatively along Russia's various borders (leaving Russia vaguely insulted but generally unconcerned). It can be argued that all the previous victims of US foreign policy—Afghanistan, Iraq, Libya, Syria, even the Ukraine—are too small to produce failure writ large enough to satisfy America's appetite for failure. Russia, on the other hand, especially when incentivized by thinking that it is standing up to some sort of new, American-style fascism, has the ability to deliver to the US a foreign policy failure that will dwarf all the previous ones.
Analysts have proposed a variety of explanations for America's hyperactive, oversized militarism. Here are the top three:
1. The US government has been captured by the military-industrial complex, which demands to be financed lavishly. Rationales are created artificially to achieve that result. But there does seem to be some sort of pressure to actually make weapons and field armies, because wouldn't it be far more cost-effective to achieve full-spectrum failure simply by stealing all the money and skip building the weapons systems altogether? So something else must be going on.
2. The US military posture is designed to assure Americans of their imagined “full-spectrum dominance” over the entire planet. But “full-spectrum dominance” sounds a little bit like “success,” whereas what we see is full-spectrum failure. Again, this story doesn't fit the facts.
3. The US acts militarily to defend the status of the US dollar as the global reserve currency. But the US dollar is slowly but surely losing its attractiveness as a reserve currency, as witnessed by China and Russia acting as swiftly as they can to unload their US dollar reserves, and to stockpile gold instead. Numerous other nations have entered into arrangements with each other to stop using the US dollar in international trade. The fact of the matter is, it doesn't take a huge military to flush one's national currency down the toilet, so, once again, something else must be going on.
There are many other explanations on offer as well, but none of them explain the fact that the goal of all this militarism seems to be to achieve failure.
Perhaps a simpler explanation would suffice? How about this one:
The US has surrendered its sovereignty to a clique of financial oligarchs. Having nobody at all to answer to, this American (and to some extent international) oligarchy has been ruining the financial condition of the country, running up staggering levels of debt, destroying savings and retirements, debasing the currency and so on. The inevitable end-game is that the Federal Reserve (along with the central banks of other “developed economies”) will end up buying up all the sovereign debt issuance with money they print for that purpose, and in the end this inevitably leads to hyperinflation and national bankruptcy. A very special set of conditions has prevented these two events from taking place thus far, but that doesn't mean that they won't, because that's what always happens, sooner or later.
Now, let's suppose a financial oligarchy has seized control of the country, and, since it can't control its own appetites, is running it into the ground. Then it would make sense for it to have some sort of back-up plan for when the whole financial house of cards falls apart. Ideally, this plan would effectively put down any chance of revolt of the downtrodden masses, and allow the oligarchy to maintain security and hold onto its wealth. Peacetime is fine for as long as it can placate the populace with bread and circuses, but when a financial calamity causes the economy to crater and bread and circuses turn scarce, a handy fallback is war.
Any rationale for war will do, be it terrorists foreign and domestic, Big Bad Russia, or hallucinated space aliens. Military success is unimportant, because failure is even better than success for maintaining order because it makes it possible to force through various emergency security measures. Various training runs, such as the military occupation of Boston following the staged bombings at the Boston Marathon, have already taken place. The surveillance infrastructure and the partially privatized prison-industrial complex are already in place for locking up the undesirables. A really huge failure would provide the best rationale for putting the economy on a war footing, imposing martial law, suppressing dissent, outlawing “extremist” political activity and so on.
And so perhaps that is what we should expect. Financial collapse is already baked in, and it's only a matter of time before it happens, and precipitates commercial collapse when global supply chains stop functioning. Political collapse will be resisted, and the way it will be resisted is by starting as many wars as possible, to produce a vast backdrop of failure to serve as a rationale for all sorts of “emergency measures,” all of which will have just one aim: to suppress rebellion and to keep the oligarchy in power. Outside the US, it will look like Americans blowing things up: countries, things, innocent bystanders, even themselves (because, you know, apparently that works too). From the outside looking into America's hall of one-way mirrors, it will look like a country gone mad; but then it already looks that way. And inside the hall of one-way mirrors it will look like valiant defenders of liberty battling implacable foes around the world. Most people will remain docile and just wave their little flags.
But I would venture to guess that at some point failure will translate into meta-failure: America will fail even at failing. I hope that there is something we can do to help this meta-failure of failure happen sooner rather than later.
- Stunning Drone Footage Depicts Syria's Dying Capital
In late October, we brought you what we called “haunting” drone footage of the devastation in Syria, where five years of bloody conflict has cost the country both its population and its cultural heritage.
“The civil war has been going on four years. What is now left of Syria?,” Die Presse asked President Bashar al-Assad in a December interview.
“If they talk about the infrastructure, much of it is destroyed,” Assad responded.
“Every day you can hear the shelling, even here in Damascus, quite close to us,” Die Presse continued, underscoring the extent to which the country’s crumbling capital is still under siege from rebels.
Below, find new drone footage of the hollowed out city courtesy of RT followed by excerpts from “The Slow Death of Damascus,” as originally published in Foreign Policy.
* * *
From “The Slow Death of Damascus,” by Thanassis Cambanis
Over the course of a recent 10-day visit, Damascus residents said they feel less embattled than they did a year ago, but the war is still an inescapable reality of everyday life. Every night, dozens of mortars still land in the city center, sending wounded and sometimes dead civilians to Damascus General Hospital. From the city’s still-busy cafés, clients can hear the thuds of outgoing government guns and the rolling explosions of the barrel bombs dropped on the rebel-held suburb of Daraya.
Army and militia checkpoints litter the city. In some central areas, cars are stopped and searched every two blocks. Still, rebels manage to smuggle car bombs into the city center. According to residents, explosions occur every two or three weeks, but are rarely reported in the state media.
Workplaces across the country have emptied out over the summer, as Syrians with a few thousand dollars to spare risked the trip to Europe via Turkey and a boat ride to Greece, taking advantage of a newly permissive Syrian government policy to issue passports quickly and without question.
Employees in government offices, international aid organizations, and private Syrian corporations estimated that anywhere between 20 and 50 percent of their coworkers left the country this summer.
“The government doesn’t care if people leave. It can’t stop them,” one middle-class Syrian, who has chosen so far to remain in Damascus, said of the exodus. “The war seems like it will go on forever. People see no future for their children. The only people who are staying are the ones who have it really good here or the ones who aren’t able to leave.”
- "I Don't Have Faith Anymore": Frustrated Chinese Shun Stocks For Safety Of Dollars, Gold
Back in March of last year we noted, with some incredulity, that some 30% of China’s newly-minted day traders had an elementary education or less. Even more incredible, we learned that nearly 6% of the country’s new “investor” class were illiterate.
Just days after we made that startling revelation we gave readers an idea of just how many Chinese were opening new stock trading accounts each month. In March for instance, Chinese farmers, housewives, and all manner of other amatuer traders opened enough brokerage accounts for every man woman and chile in Los Angeles.
But it gets worse. Not only were millions of semi-literate Chinese starting to trade without being able to read let alone conduct fundamental analysis, they were buying into a market gone parabolic:
Worse still, they were buying on margin – heavily:
By summer, the stage was set for a truly epic meltdown on the SHCOMP and especially on the tech-heavy Shenzhen.
Sure enough, in June, the wheels started to come off.
As we warned when the plunge began, China was facing more than a stock market selloff. Beijing had managed to give legions of day trading Chinese the idea that stocks always went up. That encouraged many people to plow their life savings into the market on margin. When the unwind began – starting with the half dozen or so backdoor margin lending channels that helped to pump an extra CNY1.5 trillion into stocks – many Chinese were confronted with the possibility that they may lose everything.
Take the case of Yang Cheng for instance, who, having piled his life savings (plus his relatives’ money) into the market thanks to encouragement from his broker, borrowed $1 million in margin and bet it all on one stock – a local mining company. When the trade blew up, he lost it all. “I don’t know what to do. I trusted the government too much. I won’t touch stocks again, I have ruined everyone in my family,” he lamented.
In short, China faced the prospect that the meltdown could trigger social unrest, which partly explains why Beijing scrambled to funnel nearly CNY2 trillion propping up the market. The story of the Chinese retail investor became so ubiquitous that Western media started what at times felt like a contest to see who could capture the most amusing pictures of distraught Chinese day traders.
Now, having watched their money disappear into the Beijing smog, many Chinese are bitter and say they have given up on the stock market forever.
“Unlike Western markets where institutional investors dominate, individuals account for 80 percent of transactions on Chinese exchanges [and] nearly 100 million people have trading accounts,” Reuters wrote on Thursday. “Their enthusiasm for stocks drove China’s main indexes to record highs in the first half of 2015, but after enduring a summer bust that saw prices plunge around 40 percent, the January sell-off has been the final straw for many.”
Many, like 22-year old Zhou Junan who says he “had planned to sell when indexes got a little bit higher,” but missed the top. “I don’t have faith in the stock market any more. I think it’s better to buy dollars,” he says, underscoring the extent to which everyday Chinese are rushing to exchange RMB for USD in the new year.
Reuters also quotes a 48-year old bank accountant from Kunshan who recently bought 500,000 yuan ($76,000) worth of U.S. currency. The Chinese stock market is “a mess,” she says. “Dollar is far less risky.”
Now you’re beginning to see why the likes of ICBC are running out of physical dollars.
But it’s not just greenbacks Chinese are turning to. They also like gold. “Except for gold, all other assets are just bubbles to me,” one 24-year-old female investor in Beijing said. “I guess I am a pessimist. If there are really some global conflicts, even dollars and bonds could not buy a meal.”
Unfortunately it’s out of the proverbial frying pan and into the fire for many Chinese though, as it seems that the allure of high yielding assets is just too much for the uninformed masses. “A number of retail investors were also switching money out of stocks and into wealth management products (WMPs) and principal-protected funds,” Reuters adds.
“I have bought different kinds of WMPs from banks. The majority of them are backed by bonds, which are less risky,” said a 50-year-old woman surnamed Wang, from Guangzhou, who said she lost 30 percent of her stock market investment in the summer meltdown before selling out in August.
That, as we’ve shown, is not necessarily the case. In many cases, investors have no idea what “assets” are backing the WMPs. Additionally, investors are often unaware that the products suffer from duration mismatch, meaning that if the paper stops rolling, the music stops until the underlying assets can be liquidated. Perhaps Ms. Wang should ask some investors in Fanya Metals’ WMPs what can happen in a pinch.
In any event, the message is clear: the disaffection with stocks in China is rampant which means every rip will be sold as the retail investors which comprise more than three quarters of the market scramble to salvage what’s left of their money. Once they’ve cashed out of equities they’ll promptly exchange their yuan for dollars as the capital flight which China so desperately needs to contain continues unabated.
- Ron Paul Warns: "Watch The Petrodollar"
Submitted by Nick Giambruno via InternationalMan.com,
The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value. We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or euros. The sooner the better. – Ron Paul
Ron Paul is calling for the end of the petrodollar system. This system is one of the main reasons the U.S. dollar is the world’s premier reserve currency.
Essentially, Paul is saying that understanding the petrodollar system and the forces affecting it is the best way to predict when the U.S. dollar will collapse.
Paul and I discussed this extensively at one of the Casey Research Summits. He told me he stands by his assessment.
Nick Giambruno and Ron Paul
This is critically important. When the dollar loses its coveted status as the world’s reserve currency, the window of opportunity for Americans to protect their wealth from the U.S. government will definitively shut.
At that point, the U.S. government will implement the same destructive measures other desperate governments have used throughout history: overt capital controls, wealth confiscation, people controls, price and wage controls, pension nationalizations, etc.
The dollar’s demise will wipe out the wealth of a lot of people. But it will also trigger political and social consequences likely to be far more damaging than the financial fallout.
The two key takeaways are:
- The U.S. dollar’s status as the premier reserve currency is tied to the petrodollar system.
- The sustainability of the petrodollar system relies on volatile geopolitics in the Middle East (where I lived and worked for several years).
From Bretton Woods to the Petrodollar
The Bretton Woods international monetary system, which the Allied powers created in 1944, turned the dollar into the world’s premier reserve currency.
After WWII, the U.S. had by far the largest gold reserves in the world (around 706 million ounces). These large reserves – in addition to winning the war – allowed the U.S. to reconstruct the global monetary system around the dollar.
The Bretton Woods system tied virtually every country’s currency to the U.S. dollar through a fixed exchange rate. It also tied the U.S. dollar to gold at a fixed exchange rate.
Countries around the world stored dollars for international trade or to exchange with the U.S. government at the official rate for gold ($35 an ounce at the time).
By the late 1960s, excessive spending on welfare and warfare, combined with the Federal Reserve monetizing the deficits, drastically increased the number of dollars in circulation relative to the gold backing them.
Naturally, this made other countries exchange more dollars for gold at an increasing rate. This drained the U.S. gold supply. It dropped from 706 million ounces at the end of WWII to around 286 million ounces in 1971 (a figure supposedly held constant to this day).
To stop the drain, President Nixon ended the dollar’s convertibility for gold in 1971. This ended the Bretton Woods system.
In other words, the U.S. government defaulted on its promise to back the dollar with gold. This eliminated the main motivation for other countries to hold large U.S. dollar reserves and use the U.S. dollar for international trade.
With the dollar no longer convertible into gold, demand for dollars by foreign nations was sure to fall, and with it, the dollar’s purchasing power.
OPEC, a group of oil-producing countries, passed numerous resolutions after the end of Bretton Woods, stating its need to maintain the real value of its earnings. It even discussed accepting gold for oil. Ultimately, OPEC significantly increased the nominal dollar price of oil.
For the dollar to maintain its status as the world’s reserve currency, the U.S. would have to concoct a new arrangement that gave foreign countries a compelling reason to hold and use dollars.
The Petrodollar System
From 1972 to 1974, the U.S. government made a series of agreements with Saudi Arabia. These agreements created the petrodollar system.
The U.S. government chose Saudi Arabia because of its vast petroleum reserves, its dominant position in OPEC, and the (correct) perception that the Saudi royal family was corruptible.
In essence, the petrodollar system was an agreement that the U.S. would guarantee the survival of the House of Saud. In exchange, Saudi Arabia would:
- Use its dominant position in OPEC to ensure that all oil transactions would happen in U.S. dollars.
- Invest a large amount of its dollars from oil revenue in U.S. Treasury securities and use the interest payments from those securities to pay U.S. companies to modernize the infrastructure of Saudi Arabia.
- Guarantee the price of oil within limits acceptable to the U.S. and prevent another oil embargo by other OPEC members.
Oil is the world’s most traded and most strategic commodity. Needing to use dollars for oil transactions is a very compelling reason for foreign countries to keep large U.S. dollar reserves.
For example, if Italy wants to buy oil from Kuwait, it has to purchase U.S. dollars on the foreign exchange market to pay for the oil first. This creates an artificial market for U.S. dollars that would not otherwise exist.
The demand is artificial because the U.S. dollar is just a middleman in a transaction that has nothing to do with a U.S. product or service. Ultimately, it translates into increased purchasing power and a deeper, more liquid market for the U.S. dollar and U.S. Treasuries.
Additionally, the U.S. has the unique privilege of not having to use foreign currency to buy imports, including oil. Instead, it gets to use its own currency, which it can print.
It’s hard to overstate how much the petrodollar system benefits the U.S. dollar. It’s allowed the U.S. government and many Americans to live beyond their means for decades.
What to Watch For
The geopolitical sands of the Middle East are rapidly shifting.
Saudi Arabia’s strategic regional position is weakening. Iran, which is notably not part of the petrodollar system, is on the rise. U.S. military interventions are failing. And the emerging BRICS countries are creating potential alternatives to U.S.-dominated economic/security arrangements. This all affects the sustainability of the petrodollar system.
I’m watching the deteriorating relationship between the U.S. and Saudi Arabia with a particularly close eye.
The Saudis are furious because they don’t think the U.S. is holding up its end of the petrodollar deal by more aggressively attacking their regional rivals.
This suggests that they might not uphold their part of the deal much longer, namely selling their oil exclusively in U.S. dollars.
The Saudis have even suggested a “major shift” is under way in their relationship with the U.S. To date, though, they haven’t matched their words with action, so it may just be a temper tantrum or a bluff.
The Saudis need an outside protector. So far, they haven’t found any suitable replacements for the U.S. In any case, they’re using truly unprecedented language.
This situation may reach a turning point when U.S. officials start expounding on the need to transform the monarchy in Saudi Arabia into a “democracy.” But don’t count on that happening as long as Saudi oil sells exclusively for U.S. dollars.
Regardless, the chances that the Kingdom might implode on its own are growing.
For the first time in decades, observers are calling into question the viability of the Saudi currency, the riyal. The Saudi central bank currently pegs the riyal at a rate of 3.75 riyals per U.S. dollar.
The Saudi government spends a ton of money on welfare to keep its citizens sedated. Lower oil prices plus the cost of their mischief in the region are cutting deep into government revenue. So there’s less money to spend on welfare.
There’s a serious crunch in the Saudi budget. They’ve only been able to stay afloat by draining their foreign exchange reserves. That threatens their currency peg.
Recently, Saudi officials have begun telling the media that the currency peg is fine and there’s nothing to worry about. That’s another clue that there’s trouble. Official government denial is almost always a sign of the opposite. It’s like the old saying: “Believe nothing until it has been officially denied.”
If there were a convenient way to short the Saudi riyal, I would do it in a heartbeat.
Timing the Collapse
Long before Nixon ended the Bretton Woods system in 1971, it was clear that a paradigm shift in the global monetary system was inevitable.
Today, another paradigm shift seems inevitable. As Ron Paul explained, there’s one sure way to know when that shift is imminent:
We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or euros.
It’s very possible that, one day soon, Americans will wake up to a new reality, just as they did in 1971 when Nixon severed the dollar’s final link to gold.
The petrodollar system has allowed the U.S. government and many U.S. citizens to live way beyond their means for decades. It also gives the U.S. unchecked geopolitical leverage. The U.S. can exclude virtually any country from the U.S. dollar-based financial system…and, by extension, from the vast majority of international trade.
The U.S. takes this unique position for granted. But it will disappear once the dollar loses its premier status.
This will likely be the tipping point…
Afterward, the U.S. government will be desperate enough to implement capital controls, people controls, nationalization of retirement savings, and other forms of wealth confiscation.
I urge you to prepare for the economic and sociopolitical fallout while you still can. Expect bigger government, less freedom, shrinking prosperity…and possibly worse.
It’s probably not going to happen tomorrow. But it’s clear where the trend is headed.
Once the petrodollar system kicks the bucket and the dollar loses its status as the world’s premier reserve currency, you will have few, if any, options to protect yourself.
This is why it’s essential to act before that happens.
The sad truth is, most people have no idea how bad things could get, let alone how to prepare…
Yet there are straightforward steps you can start taking today to protect your savings and yourself from the financial and sociopolitical effects of the collapse of the petrodollar.
This recently released video will show you where to begin. Click here to watch it now.
- Alberta Freezes Government Salaries As Canada's Oil Patch Enters Second Year Of Recession
On Wednesday, we documented the astonishing prices beleaguered Canadians are now forced to pay for groceries thanks to the plunging loonie.
Oil’s inexorable decline has the Canadian dollar in a veritable tailspin and because Canada imports the vast majority of its fresh food, prices on everything from cucumbers to cauliflower are on the rise, tightening the screws an already weary shoppers.
Soaring food prices are but the latest slap in the face for Canadians and especially for Albertans who have been hit the hardest by 13 months of crude carnage. Resources account for a third of provincial revenue and with oil and gas investment expected to have fallen over 30% in 2015, Alberta’s economy has is expected to contract for the foreseeable future.
The economic malaise has had a number of nasty side effects including soaring property crime in Calgary, rising food bank usage, and sharply higher suicide rates.
With the outlook for oil prices not expected to improve in the near-term, ATB now says the province faces two long years of recession. “The pain is going to be concentrated in the first half of the year. But we don’t really see any ending in sight to a downturn at least until the end of the year. So we are calling for another contraction,” ATB’s Chief Economist Todd Hirsch says in The Alberta Economic Outlook Q1 2016 report.
“This low price environment continues to discourage new investment and spending and has weighed down employment — not only in the oilpatch, but throughout most sectors of the province,” Hirsch continues. “This downturn is longer in duration certainly than 2009 was which was a very quick downturn but very short-lived. This one is going to linger on longer.“
Indeed. Here are some charts from the report which underscore the magnitude of the sharp reversal in fortunes.
It’s against this backdrop that we get the latest sign of the times in Alberta where Finance Minister Joe Ceci has just announced a two-year wage freeze for non-union government employees.
“The move will freeze the salaries — and movement within salary grids — for roughly 7,000 senior officials, managers and other non-unionized government employees at 2015 levels until at least April 2018,” As the Calgary Herald reports. “The freeze means senior government officials, including trade representatives, board chairs and deputy ministers, won’t get a scheduled 2.5-per-cent salary hike this April put in place by the former Progressive Conservative government.”
“This is not a decision we made lightly,” Ceci told the press. “The Alberta Public Service is made up of hard working and dedicated women and men who do valuable work each and every day in the service of Albertans. However, to maintain stability and protect jobs within the public service, we must deal with the economic realities we’re facing.”
As The Herald goes on to note, “the NDP government posted a record $6.1 -billion deficit in its fall budget released last October and, for the first time in two decades, is set to take on more debt to pay for operational spending.”
“During a time of massive private sector job losses, Albertans want the government to reduce spending while protecting front-line services” Wildrose Leader Brian Jean said, praising the decision.
Right. But don’t expect jobless Albertans to be overly sympathetic to the plight of the government employees subject to the salary freeze. The senior workers affected will all still make between $110,246 and $286,977.
Stay positive Canada…
- Shanghai Composite Opens Under 3,000 As Onshore Yuan Practically Unchanged For Fourth Day
Having made its warning to the Fed loud and clear (“if you hike or otherwise push the USD any higher, we will crush your markets by devaluing the Yuan against everyone but mostly the USD“), the PBOC continued the fragile ceasefire between the world’s two most powerful central banks, when moments ago it kept the onshore Yuan virtually unchanged, by weakening today’s fixing by 0.03% to 6.5637. However, as can be seen on the chart below, this has barely even registered.
The lack of any action in the onshore Yuan has been mirrored in the offshore version of the currency as well, where the CNH has likewise barely budged as shorts have learned their lesson for the time being and few, if any, are willing to risk seeing an 80% overnight margin increase once the Beijing artillery comes storming in and soaking up liquidity.
But while China’s currenc(ies) have been a snoozefest so far, more interesting things are taking place in Hong Kong, where the dollar, which plunged yesterday the most since 2003, has rebounded in early trading, but after initially surging to 7.7746, the biggest jump since March 2015 has once again proceeded to weaken now that capital outflows are taking place through Hong Kong.
We are curious to see just how the PBOC will plug this particular capital outflow gap next.
Finally, after yesterday’s furious intervention-driven rally in Chinese stocks, moments ago the Shanghai Composite opened for trading below 3000, and as of this moment was lower by about 0.4% to 2,992, suggesting it will be yet another busy day for the PBOC which not having to worry about manipulating its currency can focus on manipulating the stock market instead.
- "Willing Idiots" & Geopolitical Instability
Submitted by Gregory Copley via OilPrice.com,
Nature has often been described in the verse “Little fish have smaller fish, upon their backs to bite ’em; / Smaller fish have lesser fish; / And so, ad infinitum.” We see in it the inevitable, albeit infinitely variable, hierarchy of the natural world.
It follows, then, that regional strategic dynamics are subordinate to, often caused by, greater global trends, even though we, as humans, tend to focus on, and react to, the issues which we feel threaten or benefit us. Of course, the strength of the trends determines some of the outcomes: strong local trends may expand to resist or overwhelm weak global or trans-regional trends. But, in essence, greater is greater. And, as the Cold War saying about “quality versus quantity” went: quantity eventually has its own quality.
So where are we today? What are the essential trends, visible now, which determine long-term outcomes?
Periods of transition between “rising powers” and “declining powers” have been described in terms of the so-called Thucydides Trap, when fear within a static or declining power (historically, Athens) of a rising power (historically, Sparta) makes war seemingly inevitable. The phenomenon today applies not only to the China-U.S. dynamic – as has been widely remarked – but to the Middle Eastern imbalance, the “north-south” imbalance, and so on.
Accompanying this sliding vertical scale of strategic power balance is the sliding horizontal scale of population volatility and movement, characterized by the breakdown of the Westphalian nation-state concept; by so-called globalization; urbanization and hysteria-driven migration; and the peaking and imminent troughing of global population numbers. Thus do we reach the four-dimensional chess game. And we see visible the prospect of a check-mate — from Persian shah mat: the king is dead, or helpless — in the present global game. Of course we also see, then, the prospect, or nature’s necessity, for a “new game”, a new king.
It should not be surprising that these longer-duration mega-trends ultimately drive and dominate shorter-duration regional or mono-cultural trends, although the direct influence may not be immediately perceivable. And so we focus on immediate threats; we react, rather than see the broader, longer strategic terrain.
Right now, much of the world concerns itself with the threat of terrorism as the specter which dominates the question of the survival of Western civilization, or is the precursor to Islam’s “End of Battles”. However, it is worth recognizing the reality that no terrorist phenomenon has ever sustained itself for any meaningful duration — or achieved strategic outcomes — in the absence support from a nation-state or wealth society.
Does anyone, after introspection, believe that the current phenomenon of “Islamist terrorism”, including its metamorphosis into territory-holding entities such as the “Islamic State” or (briefly) Boko Haram, has not been without major state support since before even the al-Qaida movement? Does anyone believe that the leftist terrorism of the mid-Cold War period was not supported by state sponsors, ranging from the USSR and the People’s Republic of China (PRC) and their allies? Does anyone believe that the Irish terrorism of that same period was not also supported by states or societal bodies (including criminal organizations)?
There is an entire industry in the security sphere which has as its rice-bowl the study and parsing of Islamist ideology and sectarian differences. The sectarian differences do have strategic importance, but not because of the differences themselves, or the dialectic in which each social group engages, but because — as social groups — they represent the modes of social cohesion which enable populations to exist and manage their affairs in their geographic spaces and environments. This is as much a part of the survival logic — because it creates a political hierarchy — as the terroir dictate of crop rotation.
Now, and for the foreseeable couple of decades, the “Thucydides Trap” means that the world is not only in a period of potentially changing its power balance, or “correlation of forces”, it is in a period of dark uncertainty at very many levels, from global to regional to societal. That means, essentially, that most powers are weak, and therefore are cautious about behaving in a precipitous manner. Or they perceive that there is opportunity (or the imperative to act) because of the weakness of others.
This, in turn, means that sovereign governments will continue, perhaps increasingly, to use proxy forces, such as terrorist groups, to achieve strategic outcomes. In some respects, the desired strategic outcome is merely to achieve paralysis or stalemate in a geopolitical arena. But in almost every instance the guiding hand of such policy is power politics, rather than ideology or theology.
We can – and often do – spend vast amounts of our attention analyzing religious or ideological trends rather than looking at the underlying geopolitics. This is presently the case in the terrorist/insurgency jungles of the Middle East and Central Asia. The main problem is that we listen to what the operational protagonists – the “willing idiots”, as Lenin would describe them – say and believe, and insufficient time analyzing the core motives of their deep sponsors.
Ideology and theology are carrier waves, not the message. Do they motivate “willing idiots”? Without doubt. But to deal primarily with the carrier wave aspect is to be reactive and tactical; not strategic and in control of events.
Who prospers in this “greater Thucydides Trap”? Those who prize core geopolitical principles, including national and civilizational identities; those who preserve strategic self-sufficiency. Those who do what they must for the decades ahead, not what is comfortable for the present.
- "Markets Crash When They're Oversold"
Submitted by Lance Roberts via RealInvestmentAdvice.com,
Peddling Fiction
On Tuesday, as I watched the President’s State of the Union Address, the President made the following statement.
“Anyone claiming that America’s economy is in decline is peddling fiction.”
While I certainly understand the need to put a positive spin on the current economic backdrop during your last SOTU address, there is a good bit of misstatement in that comment.
The President is correct when he stated that the impact of technology on wage growth and jobs was not a recent development. It is, in fact, an impact that has been occurring since the 1980’s as shown in the chart below.
While the big driver of the decline in economic growth since the 1980’s has been a structural change from a manufacturing based economy (high multiplier effect) to a service based one (low multiplier effect), it has been exacerbated by the increase in household debt to offset the reduction in wage growth to maintain the standard of living. This is shown clearly in the chart below.
The problem for the President is that while sound-bytes of optimism certainly play well with the media, the average American is well aware of their current plight of the lack of wage growth, inability to save and rising costs of living.
The decline of economic growth is, unfortunately, a reality and an inevitable outcome of decades of deficit spending and debt accumulation. Can it be reversed? I honestly don’t know, but Japan has been trapped in this cycle for 30-years and has yet to find a solution.
Here’s Real Fiction – Low Oil Prices
Over the last couple of years, economists from Wall Street, to the Federal Reserve, to the White House have repeatedly made the following statement:
“Falling oil prices are great for the consumer as it gives them more money to spend.”
I have written many times over the past couple of years, as oil prices fell, that such was not actually the case. To wit:
“The argument is that lower oil prices lead to lower gasoline prices that give consumers more money to spend. The argument seems to be entirely logical since we know that roughly 80% of households in America effectively live paycheck-to-paycheck meaning they will spend, rather than save, any extra disposable income.
The problem is that the economy is a ZERO-SUM game and gasoline prices are an excellent example of the mainstream fallacy of lower oil prices.
Example:
- Gasoline Prices Fall By $1.00 Per Gallon
- Consumer Fills Up A 16 Gallon Tank Saving $16 (+16)
- Gas Station Revenue Falls By $16 For The Transaction (-16)
- End Economic Result = $0
Now, the argument is that the $16 saved by the consumer will be spent elsewhere. This is the equivalent of ‘rearranging deck chairs on the Titanic.'”
Increased consumer spending is a function of increases in INCOME, not SAVINGS. Consumers only have a finite amount of money to spend and whatever “savings” there may be at the pump, it gets quickly absorbed by rising costs of living – like health care.
Most importantly, the biggest reason that falling oil prices are a drag on economic growth, as opposed to the incremental “savings” to consumers, is the decline in output by energy-related sectors.
Oil and gas production makes up a hefty chunk of the “mining and manufacturing” component of the employment rolls. Since 2000, when the oil price boom gained traction, Texas comprised more than 40% of all jobs in the country according to first quarter data from the Dallas Federal Reserve.
The obvious ramification of the plunge in oil prices is eventual loss of revenue leads to cuts in production, declines in capital expenditure plans (which comprises almost 1/4th of all CapEx expenditures in the S&P 500), freezes and/or reductions in employment, and declines in revenue and profitability.
The issue of job loss is critically important. Since the financial crisis the bulk of the jobs “created” have been in lower wage paying areas such as retail, healthcare and other service sectors of the economy. Conversely, the jobs created within the energy space are some of the highest wage paying opportunities available in engineering, technology, accounting, legal, etc. In fact, each job created in energy-related areas has had a “ripple effect” of creating 2.8 jobs elsewhere in the economy from piping to coatings, trucking and transportation, restaurants and retail.
Simply put, lower oil and gasoline prices may have a bigger detraction on the economy than the “savings” provided to consumers.
Why do I remind you of this basic economic reality – because it only took the Federal Reserve 18-months to figure it out. In a recent speech San Fran Fed president John Williams actually admitted the truth.
“The Fed got it wrong when it predicted a drop in oil prices would be a big boon for the economy. It turned out the world had changed; the US has a lot of jobs connected to the oil industry.”No S*^t!Markets Crash When Oversold
Earlier this week, I discussed the oversold nature of the market and the likely of a “bounce” to “sell into.”
“With all of the alarm bells currently triggering, the initial ‘emotionally’ driven response is most likely an urge to go look at your portfolio statement and start pushing the ‘sell’ button. Don’t Do It!
On a short-term basis, prices oscillate back and forth like a rubber band be pulled and let loose. Physics state that a rubber band stretched in one direction, will initially travel an equal distance in the opposite direction when released.
Take a look at the chart below.”
“In particular note the top and bottom portions of the chart. These two indicators measure the ‘over-bought’ and ‘over-sold’ conditions of the market. As with the rubber band example above, you will notice that when these indicators get stretched to the downside, there is an effective ‘snap back’ in fairly short order.
With the markets having issued multiple sell signals, broken very important support and both technical and fundamental deterioration in progress, it is suggested that investors use these ‘snap back’ rallies to reduce equity risk in portfolios.”
I reiterate this point because the market continued to slide on Wednesday which led to several comments about the inability of the markets to get a sellable bounce. There is an important “truism” to remember.
“Markets crash when they’re oversold.”
Let’s step back and take a look at the past two major bull markets and subsequent bear market declines.
(Note: I am using weekly data to smooth volatility)
The top section of the chart is a basic “overbought / oversold” indicator with extreme levels of “oversold” conditions circled. The shaded area on the main part of the chart represents 2-standard deviations of price movement above and below the short-term moving average.
There a couple of very important things to take away from this chart. When markets begin a “bear market” cycle [which is identified by a moving average crossover (red circles) combined with a MACD sell-signal (lower part of chart)], the market remains in an oversold condition for extended periods (yellow highlighted areas.)
More importantly, during these corrective cycles, market rallies fail to reach higher levels than the previous rally as the negative trend is reinforced. All of these conditions currently exist.
Does this mean that the markets will go straight down 20% without a bounce? Anything is possible. However, history suggests that even during bear market cycles investors should be patient and allow rallies to occur before making adjustments to portfolio risk. More often than not, it will keep you from panic selling a short-term market bottom.
- The "World's Most Bearish Hedge Fund" Crushed It In 2015
The name of $2.8 billion Horseman Capital is familiar to regular readers for two main reasons: not only has the fund, which some have called the “most bearish in the world”, generated tremendous returns ever since inception except for a 25% drop in 2009 (after returning 31% during the cataclysmic 2008), but more notably, it has been net short – and quite bearish on – stocks ever since 2012. In that period it has consistently generated low double-digit returns, a feat virtually none of its competitors have managed to replicate. In fact, its performance has put it in the top percentile of all hedge funds in recent years.
And, according to its December letter, Horseman not only crushed it in both December and 2015, but knocked it out of the ballpark. Here’s why:
It’s hardly new to Horseman, which has been “crushing it” for four years in a row, and not surprisingly, 2015 was its best year since 2008.
What is most amazing is that as noted above, Horseman has been bearish since 2012 while outperforming most hedge funds and as of this moment is net short by a whopping -68%, which could certifiably put it in the running for the title of the “world’s most bearish hedge fund.”
Here is how Horseman made a killing in December:
This month the gains came from the short portfolio, in particular from oil and oil transportation, EM financials and automobile sectors. The short exposure to real estate and the long portfolio incurred modest losses.
What was the fund most bearish on? Pretty much everything, but a few sectors in particular:
Furthermore, Horseman seems to have an unusually bearish bias toward Mexico and especially Pemex and the Mexican auto sector. Here’s why:
In Latin America, the poor performances of the Argentinian and Brazilian economies are regularly making the headlines in the press, while the economy of Mexico tends to be perceived in better shape, less reliant on commodity prices and benefiting from being closer to the growing US economy. However, the Mexican economy is heavily reliant on the automobile and oil sectors, which respectively accounted for 21.6% and 10.6% of its exports in 2014.
The country runs a 2% current account deficit and a 3.19% budget deficit. The budget deficit does not take into account the losses from its national oil company Petroleos Mexicanos (Pemex), which is used by the government as a financing vehicle to finance about 30% of its budget. The company said that in the third quarter of 2015, taxes and royalties accounted to 232% of its operating results. It reported a $9.9bn net loss, its 12th consecutive quarterly loss. As a result, for 2016, the company expects to borrow $21bn, increasing outstanding debt to more than $100bn.
In November of last year, the government used an average oil price of $50 per barrel for its 2016 budget. However, since then, oil prices collapsed to $32. Including Pemex’s losses and using the Q3 quarterly results, Mexico’s budget deficit is more likely to be around 6% of GDP, a level similar to Brazil’s current official number.
In the automobile sector Mexico has overtaken Japan as the second largest source of U.S. auto imports. Mexican made vehicles account for 11% of cars and trucks sold to the U.S. The Mexican Automobile Industry Association estimated that more than 70% of the cars and light trucks headed to the US in 2015. Over the past 5 years, US purchases of cars have been largely driven by a boom in auto loans, which in our opinion is about to end.
The Mexican government has introduced structural reforms in the hope of encouraging new entrants to challenge monopolies. However, in our opinion, these reforms will take years to pay dividends, while in the short term the economy will have to adjust to low oil prices and a likely downturn in automobile demand. The fund maintains a short exposure to the Mexican peso versus the US dollar of approximately 25%.
We expect the “short Mexico” trade to become quite popular in the coming weeks.
Finally, here is the monthly essay by Russell Clark, Horseman’s CIO, which as always is a delightful read and this time has a Star Wars theme.
Yellen Skywalker inched down the corridor. There was barely any light, but the force guided her steps. Soon she felt the presence of her father, Deflation Vader. His voice rasped out a greeting.
“I have been expecting you. I can feel that the force is strong with you. Good. The Emperor has foreseen that your powers would grow, and that you would become our ally. It is time for you to join me and restore order to the universe!”
“You are wrong Vader – I would never go to dark side!”
“Ha ha ha – dark side – what dark side? Did Obi-Wan Ben Bernanke never tell you the true nature of the force?”
“What true nature?” asks a troubled Yellen.
“The force is all around us, and seeks harmony and balance. It is neither light nor dark, but cyclical. Mountains must have valleys. Light must create shadow. Action and reaction, this is all that life is. Your belief in the light side of the force, and the need for you to strenuously push it on all things, to create inflation in all things, is touching, but quite misguided.”
Vader continued “Low interest rates and debt creation in particular is an object that is neither inherently inflationary nor deflationary, but only becomes a tool of the light or the dark side if it moves out of balance, or harmony. You see my jedi, debt accumulation is inflationary when taken on and deflationary when paid back. The longer you push your light side of the force, the stronger the dark side becomes! You have in fact been my greatest ally!” Vader let out a bellowing laugh.
“Search your feelings Yellen, you know that I speak the truth”. Yellen knew the words Vader spoke were true. Despite monumental efforts, the light side had only generated minor inflation, even with previously unheard interest rates and even with their new monetary techniques. She thought back to the day her mentor Obi-Wan Ben Bernanke disappeared off to some far flung colony – his parting words as he passed responsibility for the light side to Yellen were cryptic – “Whatever you do, do not do anything sensible”. But Yellen knew she faced a dilemma, if she continued to fight the dark side she only made it stronger, and the ultimate move to harmony more difficult. Or should she succumb now, and hope that dark side influence would not destroy too much. In her heart, she made her decision.
“You are right father, I can see that. What must I do?”
“Why my child, you must do nothing, just cease to fight the dark side, and it shall restore harmony to the universe as surely as a rising tide destroys footprints in the sand. Come, let us watch”
Vader and Yellen moved over to an observation window. From the view she could see the dancing constellations that made up the financial universe. Many shone as brightly as they could. Record employment, record car sales, all-time highs in the stock market. Yellen let go of the light side of the force. Almost instantaneously, the Transport star system began to darken and disappear. The high yield nebula went into super nova and slowly began to darken. And then nothing. But as Yellen watched all the bright constellations began to darken ever so slightly. And Yellen could feel a tremor from a billion traders’ hearts, as fear began to replace greed in their hearts. She wondered what she had done, as she stood next to Vader, and watched the lights go out.
Clarke’s parting words: “Your fund remains long bonds, short equities.”
- The 'Real' Price Of Oil Is Below $17
"You see a big destruction in the income of the oil and commodity producers," exclaims on analyst but, as Bloomberg notes, while oil prices flashing across traders' terminals are at the lowest in a decade, in real terms the collapse is considerably deeper. Adjusted for inflation, WTI is its lowest since 2002 and worse still Saudi Light Crude is trading at below $17 (in 1998 dollar terms) – the lowest since the 1980s…
Slumping prices are a critical signal that the boom in lending in China is “unwinding,” according to Adair Turner, chairman of the Institute for New Economic Thinking.
In fact, while sub-$30 per barrel oil sounds very scary, Saudi prices would be less than $17 a barrel when converted into dollar levels for 1998, the year oil sank to its lowest since the 1980s.
Slowing investment and construction in China, the world’s biggest energy user, is “sending an enormous deflationary impetus through to the world, and that is a significant part of what’s happening in this oil-price collapse,” Turner, former chairman of the U.K. Financial Services Authority, said in an interview with Bloomberg Television.
* * *
So while prices are very low any description, never forget about inflation – The Fed won't!
- "It's All The Fed's Fault" Santelli Rages, They "Will Certainly Turn Us Into Japan"
Who is to blame for all this volatility? CNBC's Rick Santelli scoffs at the growing mainstream media's recognition that The Fed is to blame for daring to raise rates – "a group of unelected officials ruining the party and taking away the punch-bowl."
Santelli's problem is that "every time the picture of the world was not what The Fed wanted us to see, they changed the channel," and now they are cornered in their lies, "all along The Fed should have been honest about the true quality of the jobs data.. and now they are force to tell the truth about it, they risk losing all of their credibility."
"The notion that a small group of people should control the price of money should be under review," Rick rages, warning that "if stocks are rallying because The Fed is retreating, we certainly will turn into Japan."
Here is Santelli with two minutes of simple truth…
- Could China's Housing Bubble Bring Down The Global Economy?
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
Who's going to buy the tens of millions of empty flats held as investments?
I've been writing a lot about China recently because it's becoming increasingly clear that China's economy is slowing and the authority's "fixes" are not turning it around. That means the engine that pulled the global economy out of the 2009 recession has stalled.
Many people see China's slowdown as the source of the next global recession, but few seem to realize the extreme vulnerability of China's vast housing market and the many knock-on consequences of that market grinding to a halt.
I've just completed a comprehensive review of China's housing market, and now realize it's much worse than the consensus understands.
The consensus view is: Sure, China's housing prices are falling modestly outside of Beijing and Shanghai, but since Chinese households buy homes with cash or large down payments, this decline won't trigger a banking crisis like America's housing bubble did in 2008.
The problem isn't a banking crisis; it's a loss of household wealth, the reversal of the wealth effect and the decimation of local government budgets and the construction sector.
China is uniquely dependent on housing and real estate development. This makes it uniquely vulnerable to any slowdown in construction and sales of new housing.
About 15% of China's GDP is housing-related. This is extraordinarily high. In the 2003-08 housing bubble, housing's share of U.S. GDP barely cracked 5%.
Of even greater concern, local governments in China depend on land development sales for roughly 2/3 of their revenues. (These are not fee simple sales of land, but the sale of leasehold rights, as all land in China is owned by the state.)
There is no substitute source of revenue waiting in the wings should land sales and housing development grind to a halt. Local governments will lose 2/3 of their operating revenues, and there is no other source they can tap to replace this lost revenue.
Since China authorized private ownership of housing in the late 1990s, homeowners in China have only experienced rising prices and thus rising household wealth–at least until very recently, when prices dipped as the government tightened lending standards and imposed some restrictions on the purchase of flats as investments.
Though it's difficult to quantify the "wealth effect" the rapid rise in housing valuations supported, it's widely acknowledged that upper-middle class household spending has increased as a direct result of housing's wealth effect.
Though few dare acknowledge it, prices in desirable first-tier cities urban cores are completely unaffordable to average households. Average flats in Beijing now cost 22X annual household income — roughly six times the income-price ratio that is sustainable (3 or 4 X income = affordable cost of a house).
Far too many observers use housing prices and sales in Beijing and Shanghai–a mere 3.5% of China's population and housing stock–as the basis of entire nation's housing market. This is akin to judging America's housing market on prices and sales in Manhattan.
So while sales are soaring in Beijing, they're falling 26% in the 2nd, 3rd and 4th tier cities.
Though it is widely known that China's household wealth is concentrated in housing, the extent and consequences of this concentration are rarely discussed.
Much has been made of the $3+ trillion losses households have suffered as China's stock market bubble collapsed. But given the relatively insignificant role financial assets play in household wealth, these losses are modest compared to the far larger loss of household wealth that will occur as housing deflates from bubble heights.
Many people claim the estimated 65 million empty flats held as investments by the middle and upper classes in China will be sold to new buyers in due time. But these complacent analysts overlook the grim reality that the vast majority of urban workers make around $6,000 to $10,000 annually, and a $200,000 flat is permanently out of reach.
They also overlook the extreme concentration of wealth that goes into every purchase of a small flat byt households that really can't afford the cost: the entire extended family's wealth is often poured into the flat, and money borrowed from friends and relatives or even loan sharks.
The other problem few Western analysts consider is the impaired nature of much of China's housing stock. Millions of units constructed in the early 2000s were hastily built and are now degraded. Newer buildings are not maintained, either, and there is a strong cultural preference for new homes, not existing units. (The government doesn't even keep track of resales/sales of existing homes; whatever minimal data is available comes from private brokerages).
In other words–who's going to buy the tens of millions of empty flats held as investments? What is the market value of flats nobody wants to buy or cannot afford to buy?
China has a demographic problem as well. The generation now entering the work force is much smaller than the generation that bought two or three flats for investment. There simply aren't enough wage earners entering the home-buying years to soak up this vast and growing inventory of empty homes.
China's stated intent is to move from a fixed-investment/export dependent economy to a consumer economy. But if we consider what happens when housing slows or even grinds to a halt, we realize the impact on incomes, wealth and consumption will be extraordinarily negative, not just for China but for every nation that sells China vehicles and other consumer goods.
- Hillary's Lead Disintegrates: She Is Now Doing Worse Than In 2008, As Trump Surges
Just when Hillary Clinton thought her political fiascoes would be the worst of her ongoing troubles as she glides through the Democrat primaries, and then takes on Trump sure to find a Warren Buffett-funded victory, suddenly everything appears to have gone wrong in what is most important to the scandal-ridden former Secretary of State and presidential contender: her second – and final – campaign for president.
According to WaPo, if one compares where Clinton is now in the Real Clear Politics polling average, the 2016 picture and the 2008 picture aren’t really all that similar; in fact suddenly the trapdoor beneath Hillary appears to have sprung open. “Nationally, she was doing much better in 2008 than she is right now, perhaps in part because the anti-Clinton vote in 2008 was still split between two people — Barack Obama and John Edwards — instead of just one. But that recent trend line, a function of two new national polls that were close after a bit of a lull, is not very good news.”
Not surprisingly, Clinton is trailing badly in New Hampshire, which is the home turf of her main socialist opponent. In 2008,
What little silver lining exists, is that in Iowa, Hillary is running a little better than she did in 2008, although as seen on the chart below even here her lead has plunged recently. In 2008 it wasn’t until the last week that she fell out of the lead. She eventually came in third.
The problem remains the national race, and what’s worse, if the 2008 past is prologue and if Hillary’s lead in Iowa evaporates and she loses, it may be the end for the former first lady: back then she lost three-quarters of her lead after the caucuses although she did gain some of it back after her win in New Hampshire.
And while these numbers can easily change, one person who is certain to capitalize on Hillary’s sudden collapse is Donald Trump, who as we showed recently has become the bookmakers’ favorite after trailing badly as recently as September, even as Trump’s republican competitors drop like flies on their own, the most recent casualty being Ben Carson whose campaign is all but over following news from CNN that Carson’s campaign finance chairman Dean Parker submitted his resignation.
Finally, moments ago the WSJ reported that Donald Trump has opened a double-digit lead over his next-closest Republican rival, less than three weeks before the first votes of the 2016 presidential race are cast, a new Wall Street Journal/NBC News poll finds.
A third of Republican primary voters in the nationwide survey said they favored Mr. Trump to be the GOP nominee, followed by Texas Sen. Ted Cruz at 20% support, Florida Sen. Marco Rubio at 13% and retired pediatric neurosurgeon Ben Carson at 12%.
In December, Mr. Trump had led the No. 2 candidate, Mr. Cruz, by 5 percentage points. In the new poll, his lead widened to 13 points.
And so what was considered humor by most pundits as recently as last summer is becoming an all too possible reality: president Trump?
- Bullard Bounce 2.0 – Stocks Surge By Most Since September; Bonds, Dollar Flat
Bullard's back bitches!!!
The "intervention" began overnight as The National Team stepped in to China's most tech-heavy index ChiNext for a 9.5% rally rampapalooza off the opening lows
Then "He" spoke and the market obeyed… Dow surged 411 points off the lows – Even better than Bullard Bounce 101 (a 400 point bounce)
Will it be deja vu all over again?
It does not look like it – S&P Futs were ramped to VWAP then stalled, then ramped to Tuesday's cash close… then dumped…
However, despite today's epic Bullard Bounce, Small Caps are still suffering the worst start to a year ever…
The day started off as usual with a purge as overnight strength/stability was dumped at the open… but then Bullard Spaketh The Gospel Of StickSave and algos took over levitating with crude, then handing off to USDJPY once that ran out of steam…and then JPY handed off to VIX in the last hour…
Today was a very good day for US equities…At the highs, things were awesome…
- Nasdaq up 3% – best day in 5 months
- S&P up 2.2% – best day in 4 months
- Russell 2000 up 2.2% – best day in 3 months
- Dow up 1.9% – best day in 5 weeks
Before the end of day weakness…
It seems Bullard's Bounce did nothing to reduce the size of the policy error post Fed rate-hike…
FANTAsy stocks v-shape recovered…but dumped into the close..
VIX decoupled through the middle of the day but then was initiated for momo in the last hour…
Overall credit markets rallied but remain notably decoupled..
Energy credit markets spiked 35bps wider today despite oil's rally and energy stocks' gains…
Treasury yields trod water largely soaking up a weak auction and yesterday's huge supply from Inbev…
The USDollar Index flip-flopped after ECB comments early ending the day almost unchanged…
Commodities very mixed with gold and silver slammed and copper and crude ramped…
Silver was capped atits 50DMA…
The oil move looks a lot like an algo stop-hunt… ahead of OPEX tomorrow…
Charts: Bloomberg
- The US Government Has An Internet Killswitch – And It's None Of Your Business
Submitted by Derrick Broze via TheAntiMedia.org,
On Monday the Supreme Court declined to hear a petition from the Electronic Privacy Information Center (EPIC) that sought to force the Department of Homeland Security to release details of a secret “killswitch” protocol to shut down cellphone and internet service during emergencies.
EPIC has been fighting since 2011 to release the details of the program, which is known as Standard Operating Procedure 303. EPIC writes, “On March 9, 2006, the National Communications System (‘NCS’) approved SOP 303, however it was never released to the public. This secret document codifies a ‘shutdown and restoration process for use by commercial and private wireless networks during national crisis.’”
EPIC continues, “In a 2006-2007 Report, the President’s National Security Telecommunications Advisory Committee (‘NSTAC’) indicated that SOP 303 would be implemented under the coordination of the National Coordinating Center (‘NCC’) of the NSTAC, while the decision to shut down service would be made by state Homeland Security Advisors or individuals at DHS. The report indicates that NCC will determine if a shutdown is necessary based on a ‘series of questions.’”
Despite EPIC’s defeat at the hands of the Supreme Court, the four-year court battle yielded a heavily redacted copy of Standard Operating Procedure 303.
The fight for transparency regarding SOP 303 began shortly after a Bay Area Rapid Transit (“BART”) officer in San Francisco shot and killed a homeless man named Charles Hill on July 3, 2011. The shooting sparked massive protests against BART throughout July and August 2011. During one of these protests, BART officials cut off cell phone service inside four transit stations for three hours. This kept anyone on the station platform from sending or receiving phone calls, messages, or other data.
In July 2012, EPIC submitted a Freedom of Information Act (FOIA) request to the DHS seeking the full text of Standard Operating Procedure 303; the full text of the predetermined “series of questions” that determines if a shutdown is necessary; and any executing protocols related to the implementation of Standard Operating Procedure 303, distributed to DHS, other federal agencies, or private companies.
After the DHS fought the FOIA releases, a district court in Washington, D.C. ruled in EPIC’s favor, but that ruling was later overturned by the court of appeals. The appeals court told EPIC the government was free to withhold details of the plan under the Freedom of Information Act because the information might “endanger” the public. In 2015, the digital rights group asked the Supreme Court to review the ruling by the federal appeals court.
With the Supreme Court’s refusal to address EPIC’s petition, the issue seems to have reached a dead-end. The American people are (once again) left in the dark regarding the inner-workings of another dangerous and intrusive government program. It is only through the hard work of activists and groups like EPIC that we are at least aware of the existence of this program — but knowing bits and pieces about the protocol is not enough. In order to combat such heavy-handed measures, we need to have access to the government’s own documents. Hopefully, there is already a whistleblower preparing to release these details.
What we do with the information we do have is up to each of us as individuals. We can sit back and watch the United States further devolve into a militarized police and surveillance state — or we can spread this information, get involved locally, and create new systems outside of the current paradigm of control and exploitation.
- The Empty Suit's Seat
President Obama’s “Empty Seat” appears to have raised the ire of many…
Perhaps this is why?
- The Machines Are Going Mad – HFT Quote-Stuffing Desperation Spikes To Record High
It appears – for now – that the machines are losing control. Amid the chaos of the last few days in US equities, Johnny 5 and his ilk have been quote-stuffing in desperation at the highest rate in history… but it’s not working!!
Source: @NanexLLC
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