Today’s News 17th January 2016

• "After Me, The Jihad," Gaddafi Tried To Warn The West, But Nobody Listened

  Submitted by Dan Sanchez via TheAntiMedia.org,

  Before the French Revolution and its Reign of Terror, Louis XV predicted, “After me, the Deluge.” Before being overthrown, Libya’s secular dictator tried to warn the West of a new Reign of Terror, essentially foretelling, “After me, the Jihad.”

  This was disclosed with the recent release of phone conversations from early 2011 between Muammar Gaddafi and former British Prime Minister Tony Blair.

  The West was then gearing up to use unrest in Libya as a pretext for military intervention and regime change. Gaddafi desperately tried to convey through Blair the folly of such a war, pleading that he was trying to defend Libya from Al Qaeda, which had set up base in the country. He said:

  “They have managed to get arms and terrify people. people can’t leave their homes… It’s a jihad situation. They have arms and are terrorising people in the street.”

  Gaddafi’s warning went unheeded, and NATO, led by the U.S. and France, launched an air war that toppled Libya’s government. Later that year, Gaddafi (himself a brutal oppressor, like all heads of state) was forced out of a drainage pipe, and then beaten, sodomized, and shot in the street by a mob. His corpse was then draped over the hood of a car.

  U.S. Secretary of State Hillary Clinton, who had done more than any single person to advance the Libya War, was informed of Gaddafi’s death while on camera. Fancying herself a modern Caesar, she chortled, “We came, we saw, he died!”

  Since then, Gaddafi has been proven tragically right. As Libya descended into civil war and failed-state chaos, jihadi groups connected to Al Qaeda conquered much of the country. Libya underwent the same American “liberation” that had already befallen Afghanistan, Iraq, and Somalia — and would soon be visited on Syria and Yemen.

  Shortly after Gaddafi’s overthrow, some of the now-rampant jihadis helped the CIA run guns from Benghazi to fellow jihadis in Syria.

  Benghazi had been a rebel stronghold. The Obama administration claimed a Gaddafi-perpetrated “genocide” was imminent in that city, using that claim as the chief justification for the war. There was zero indication of such an impending atrocity. But there was ample evidence of an Al Qaeda presence in Benghazi, as Gaddafi tried to tell Blair, saying that members had “…managed to set up local stations and in Benghazi have spread the thoughts and ideas of al Qaeda.”

  After the regime change, on September 11, 2012, the jihadis turned on their U.S. allies in Benghazi, sacked the U.S. diplomatic compound, and murdered Ambassador Chris Stevens.

  Now ISIS has spread throughout Libya. Just days ago, ISIS perpetrated a truck bombing that killed dozens at a Libyan police academy in Sirte, a former Gaddafi stronghold. Indeed, Gaddafi informed Blair that jihadis had “attacked police stations” back in 2011.

  Gaddafi further warned Blair:

  “They want to control the Mediterranean and then they will attack Europe.”

  And ISIS has, indeed, been battling to take control of Libya’s main oil ports in recent weeks. The group has also long been planning to use Libya as a base from which to launch attacks on nearby southern Europe. ISIS did strike Europe recently, most famously in Paris.

  And it was not just Gaddafi personally who had been ringing such alarms to the Western powers thirsting for his blood. His intelligence officers produced reports demonstrating that heavy weapons being sent to the Libyan opposition, with NATO approval and Qatari financing, were being funneled to militants with ties to Al Qaeda. At least one of those reports was even prepared in English to facilitate its transmission to key members of Congress via U.S. intelligence.

  Yet, there was no need for the West to rely on the Libyan regime for information about the jihadi threat. Indeed, as emails recently released by the State Department reveal, Hillary Clinton’s own right-hand man had informed her before Gaddafi’s overthrow that rebels were committing war crimes, and that “…radical/terrorist groups such as the Libyan Fighting Groups and Al Qa’ida in the Islamic Maghreb (AQIM) are infiltrating the NLC and its military command.”

  As Brad Hoff reports, that same email discloses that, very early in the Libyan crisis, “British, French, and Egyptian special operations units were training Libyan militants along the Egyptian-Libyan border, as well as in Benghazi suburbs.”

  They would soon be joined by U.S. special forces and the CIA.

  The war in Libya that Hillary Clinton, U.N. Ambassador Susan Rice, and Samantha Power of the National Security Council were driving toward was so predictably a fiasco-to-come that, behind the backs of the Amazon Warriors Three, America’s top generals conspired with leftie peacenik Congressman Dennis Kucinich to try to arrange a peaceful resolution to the crisis. But the war-making diplomats triumphed over the diplomacy-making soldiers. Hillary buffaloed the brass and got her war.

  Abundant warnings of a Jihadi Deluge continued after the regime change, as well. As Nancy Youssef wrote at The Daily Beast:

  “…many celebrated Libya as a success story of limited U.S. intervention despite obvious signs there of looming instability. The British consulate in Benghazi came under an attempted assassination attack the previous summer and other nations pulled out amid rising violence. The U.S. consulate in Benghazi suffered an improvised bomb attack around the time of the strike on the British. And there were early signs of a rising jihadist presence in the eastern city. In Tripoli, Sufi shrines were destroyed. (…)

   

  “In the months leading up to the [2012 Benghazi] attack, flags belonging to a jihadist group, Ansar al Sharia, appeared in Benghazi. Ansar al Sharia members also controlled security around certain government buildings, including the hospital that would try to save Stevens.

   

  “In that ensuing power vacuum, jihadists began claiming territory, making it difficult for the moderate government to control the country. By 2013, Libya’s oil production all but stopped as the nation plunged toward civil war and a state led by two rival governments on opposite ends of the country. Efforts to create a unity government have so far faltered. Benghazi, the birthplace of the 2011 uprising, became a terrorist haven. And today, many Libyans yearn for the return of Gaddafi, however dictatorial his regime was, because of the security that came with him.”

  Conservative politicos have long strained to use Benghazi to torpedo Hillary’s bid for the presidency. But their efforts are crippled by their own fundamental agreement with Hillary’s militarism. They support the general policy of employing jihadis to overthrow secular dictators (not only in Libya, but Syria too). So they limit themselves to whining about Hillary’s security measures.

  The true Benghazi scandal indicts not just Hillary, but the entire Western power elite, whose wars have, as Gaddafi warned, flooded the world with a Jihadi Deluge and installed a postdiluvian Reign of Terror over us all.

  

  

  

  

  

• "How The Investment Grade Dominos Will Fall" – UBS Explains

  According to Citigroup’s Matt King, it is now officially too late to save junk debt, which has entered the final stage of the credit cycle, the one where defaults for high yield bonds rise with every passing month.

  

  Both what about investment grade, which according to Citi is still just ahead of the “bubble bursting phase”? Here is UBS’ credit strategist Matthew Mish with one take on what happens to IG debt over the coming 12 months.

  How The Dominos Will Fall?

  It is no secret to regular readers of our publications that we believe the credit cycle is quite advanced. As discussed in our HY outlook, we estimate that nearly $1tn of speculative-grade credits are at risk of default over the next downturn, as the stock of low-quality credit has soared. Recent contagion in US HY from energy woes has severely impacted ex-energy spreads while shutting down bond-market financing for low-quality credits. Our leading measure of non-bank liquidity has now even surpassed the weakness seen during the Eurozone crisis. These developments are a negative headwind for investment-grade corporates in 2016.

  High-grade credits are also not without blemish; the post-crisis macro paradigm of Fed quantitative easing and the investor bid for yield has greatly expanded the size of risky BBB corporates. The total IG corporate universe has grown 110% from $2.08TN in Jan 2009 to $4.35TN today; the amount of BBB debt has ballooned 181% from $0.77TN in Jan 2009 to $2.17TN today (Figure 1). Hence, nearly 63% of the increase in US IG debt has come from the growth of more risky BBB-rated securities. BBB non-financial credits now make up 41% of the total IG market, the highest level ever outside of a recession (Figure 2).

  

  Finally, leverage levels are high and climbing higher. The median IG firm’s net debt to EBITDA ratio easily surpasses that realized in 2007, and is quickly closing in on late 1990s levels (Figure 3). Combine these headwinds with market volatility and growing market illiquidity and it is no surprise to find IG credit spreads at historically wide levels (Figure 4).

  

  With that said, high-grade issuers do face tailwinds that high-yield firms do not. Our credit based recession indicator is still only signalling a 16% probability of a US recession through Q3’16. This provides some comfort that US IG spreads will remain relatively insulated from near-term weakness in high-yield. In addition, our recession probability is low precisely because high-grade firms still face historically low borrowing costs, due to low Treasury yields and a terming out of debt profiles. The recent uptick in spreads has not materially increased interest burdens for highgrade companies, unlike for junk firms. Lastly, the foreign bid for US IG paper from EUR & JPN investors is currently insatiable and should continue to support medium tenor IG corporates. The foreign bid for US HY cannot compare.

  What is our prognosis then for 2016? Investors should remain cautious about lower-quality credits and energy names that will expose them structurally to either a broader downturn in the credit cycle or lower for longer commodity prices. For us, that means investors should underweight BBB-rated securities, particularly longer-dated issuers at risk of fallen angel status (i.e. pipelines). We maintain a relative preference for lower beta US banks. Lastly, we believe that A-rated 10+ paper looks attractive, on an excess return basis (Treasury-hedged) tactically and a total return perspective structurally. Against this backdrop, we flesh out our views on the top 2016 themes likely to face high-grade investors and their implications for desired positioning next year.

   

  1) M&A will NOT be slowed by rising rates: IG issuance to hit new record

  One of the common myths perpetuated in the market today is that rising interest rates will cool off a red-hot M&A market. After all, low rates are spurring on the recent merger boom right? Not quite. In fact, one can make an argument that the presence of both significant M&A activity and low interest rates is more of an historical accident than explaining a fundamental relationship. We believe this  cycle, along with those in the past, is driven more by animal spirits and the lack of viable alternatives for CFOs who are unable to grow earnings organically. The two charts below illustrate the considerable staying power of these animal spirits.

  

  Today’s environment fits the current narrative that M&A activity is buoyed by low rates and high expected returns (proxied by the S&P 500 earnings yield). The problem is that the exact opposite occurred in the late 1990s; M&A activity surged even with high rates and low expected returns (Figure 5). An increase in highgrade yields from 2005-2007 also did not temper M&A volumes. Finally, the past two M&A cycles did not peter out until 1 year forward recession probabilities hit 50% (Figure 6). Bottom line, it takes a sufficient shock to the economy to derail an M&A cycle. A Fed rate hike cycle will not nearly be enough.

  The major implications are twofold. First, IG issuance will hit a new record in 2016 at $1.3tn, a 1% increase from 2015 levels ($1.29tn). Upside estimates of $1.45tn (+11%) are possible, particularly if episodic bouts of volatility subside more than
  expected. Last year, roughly $260bn of IG issuance (~18% of total) was due to M&A activity, and we expect similar numbers for 2016. Second, credit curves will remain historically steep; those investors positioning for a material flattening of the curve will be disappointed. Nearly 15% of all M&A activity last year was financed in the IG bond market, a high point outside of an economic downturn (Figure 7). And the majority of this debt (56% last year) is funded via long-term paper (> 9 years). This new issuance will continue to saturate a buyer base that primarily consists of US life insurers and pensions needing to hit yield bogeys that are higher than current market rates. There is not a clear catalyst in our view to flatten spread curves absent 1) a unexpected reduction in M&A activity or 2) a material increase in 30yr Treasury yields (to the mid 3% range) that increases demand from insurers and pension funds.

  

   

  2) We prefer US Banks over Non-Financials

  We express this view with some consternation as US bank spreads are not cheap and they are coming off a year where they significantly outperformed nonfinancials (1.76% total return vs. -2.84%). However, absent a broader downturn in the US economy, we still believe that US banks will continue to relatively outperform. US banks are a higher-quality segment of the IG universe and they have massively de-levered since the financial crisis, in direct contrast to their nonfin counterparts (Figure 8). Empirically, bank sector spreads also typically weaken relative to the non-financial sector when a severe economic downturn fuels increased real estate losses. One can see this clearly in Figure 9 below, where bank spreads suffered under the burden of rising real-estate NPLs in 1990 and 2008. However, banks outperformed during the early 2000s recession, when corporates faced the brunt of losses, while real estate markets exhibited strength.

  

  We are not ready to proclaim that real-estate NPLs will not be a problem during the next downturn. However, the current evidence suggests it is mainly corporate losses that are beginning to tick higher; real estate NPLs continue to fall, primarily for residential properties. An intermediate concern persists in commercial real-estate, where even though NPLs are near record lows, risks are elevated. If these begin to rise, we would expect more pressure on REIT spreads to develop.

  The increase in corporate NPLs is not solely due to energy sector woes. Banks that are less exposed to the energy sector are still displaying a modest uptick in overall C&I loans from last December (Figure 10). The increase is slight, but this is why we
  bring it up. The first increases in bank NPLs are really the only early warning indicator you get. Hence, with most weakness showing up in US corporates at this time, plus subdued probabilities of a broader US downturn, we believe a relative overweight on Fins still makes sense in 2016.

  

   

  3) We prefer A-rated credit, particularly long-duration, in 2016

  Even though overall credit curves will remain steep due to our prior discussion on M&A activity and worsening bond market liquidity, there is still room in investor portfolios to hold A-rated 10+ paper. First, we attack the credit quality question by debunking the notion that BBB spreads are trading cheap. At face value, BBB credits are trading 100bps wider than A credits, vs. an average of 67bps back to the 1990s. However, once we exclude the impact of the energy/mining sectors, BBBs are trading only 73bps wider than A’s, in-line with fair value historically. At this stage of the credit cycle, a 7bp premium on BBB credit spreads is far from an attractive risk premium (Figure 11).

  What about BBB energy? While valuations appear more attractive, we are still neutral to negative on the space. Oil forecasts continue to be marked lower. Our own UBS forecast for WTI has just been marked down by 20% out to 2017 (new 2017 target of $52). Gas pipelines in particular face significant danger as a swath of names are rated BBB- and are peering over a large gap in spreads to  high-yield status. Many BBB rated E&P spreads also appear expensive and sit tenuously near a ledge (Figure 12). However, even if oil prices bounce, it is difficult to get excited about IG energy when the backdrop of a late stage credit cycle looms. If BBB’s in general widen out relative to A’s (as we expect), the tide should take out energy names as well before too long.

  

  Tactically, we believe the prospect for near-term gains in high-grade on an excess return basis (Treasury-hedged) is reasonable, assuming no fallout in the US or Chinese economy. But instead of taking extra credit risk to boost returns, we would rather take extra spread duration in higher quality credits. A-rated 10s30s curves have just now steepened to a record high 60bps and have surprisingly converged to BBB 10s30s curves over Q4’15 (Figure 13). Much of this steepening represents significant gains in A-rated 10-year paper; 30yr A-rated spreads are still marginally tighter than October levels, holding in reasonably well during the latest selloff. However, 30yr A-rated spreads are still near historically wide levels (Figure 14).

  

  In addition, investors will NOT need to sell A-rated paper in the event that the credit cycle worsens: They will simply need to remove the underlying Treasury hedge and hold these bonds as total return instruments. This is not the case for BBB credits, where fallen angel risk is far from trivial (see next section). We strongly believe that 30yr Treasury yields have room to drop in the event of downturn, providing a significant tailwind to long-duration IG credits. This is echoed by our rates team in their 2016 outlook where risks in longer-dated Treasury yields are skewed to the downside.

  In a China hard-landing scenario that leaves the US unscathed, 30yr Treasury yields could fall to 2% as inflation expectations are reduced. At current yields of 4.6% and a duration of 13.6, returns are positive as long as 10+ A-rated spreads do not widen more than 126bps over a year. That has not happened outside of the financial crisis. In short, we would suggest going long A-rated 10+ spreads to position for moderate excess returns over the next 3-6 months. As we enter into the latter half of 2016, we would recommend removing the Treasury hedge to position for total return gains, as we expect US credit cycle issues to become more apparent.

   

  4) Fallen angels are not a 2016 story, but forward risks loom large

  In recent days, many investors have voiced concerns about the potential impact of fallen angels for global credit markets. We do not expect US fallen angels to materialize as the story of 2016, outside of the commodity sectors, as they typically ramp up during US recessions. But fallen angels are a significant issue that will surely garner more headlines down the road. And it is a fundamental reason why we want to avoid long-duration BBB-rated debt at this point in the cycle. Figure 15 below provides context for one-year fallen angel transition rates8 over time, and how the risk is significantly greater for BBB-rated credits than A-rated credits.

  

  To estimate the potential impact for 2016, we use the average one-year fallen angel probabilities from Moody’s, both from 2014 alone and the average from 1983-2014. (Implicit in this assumption is that 2016 moves us from below average risk to near average downgrade risk.) This assumption would get us $77bn of fallen angels (average of $43bn and $111bn in Figure 15) falling into a $1.05tn HY market. However, $21bn of those fallen angels would be 10+ paper splashing into a $48bn 10+ HY market. Herein lies the problem: The proliferation of longer duration BBB debt could hit a HY market that is fractions its size.

  The problem would compound later in the cycle when risks could surge. As a potential worst case scenario, we use the simple sum of probabilities from 2001- 2002 and the current debt stock as an example of what could happen during a protracted downturn. If this comes to fruition, we estimate fallen angel volumes over 2 years could spike to $413bn, with $117bn of 10+ fallen angel paper (again crashing into a 10+ HY market that is only $48bn in size). This is an ugly spectre that the high-grade markets would need to face in future years.

   

  5) In sum, what are our spread/return forecasts for IG?

  As we suggested in 20159, the sensitivity of IG spreads to HY spreads has indeed dropped sharply in recent months (Figure 16). IG spreads are only widening about 10-15 bps for each 100bps widening in HY, which is down from 25-35bps earlier in the post-crisis period (particularly when banking sector risk was still elevated). With relatively better fundamentals, more financials exposure, and the prospect for significant HY commodity related defaults, we expect IG spreads to remain resilient, though not without spread widening, before 2016 is done. Our 2016 forecast for HY spreads is currently 800-850bps. Based on the change from current spreads (763bps) and applying a beta of 0.15 (in-line with that experienced recently), IG spreads should end the year between 175-185bps. Returns will be marginally stronger than last year, though still historically weak. Excess returns (Treasury-hedged) will be between 1.5-2.2% (vs. -1.63% in 2015), aided significantly by rolling down a steep IG curve. Total returns will vary depending on your assumptions for Treasury yields. If our 2016 UBS forecasts for 10yr Treasuries yields are correct (2.5%), IG total returns would equal 1.7-3.4%. If current market expectations from the forward curve are correct (2.35%), IG total returns should fare better and range between 2.7-3.4% (vs. -0.75% in 2015).

  

  

  

  

  

  

• CNN Reassures Investors: "Don't Panic… America's Economy Is Still In Good Shape"

  Submitted by Mac Slavo via SHTFPlan.com,

  Forget for a moment that U.S. stock markets have seen their worst start to a new year since the Great Depression or that some $2.5 trillion in wealth has been evaporated in less than two weeks.

  CNN says it’s hardly the time to panic:

  Time to panic? Hardly.

   

  There are plenty of reasons to relax, especially if you are a U.S investor. Here are the top two:

   

  1. America’s economy is still in good shape.

   

  2. Staying in stocks pays off. Since World War II, investors who remained in stocks for at least 15 years made money

   

  …

   

  Right now, the U.S. economy is growing. It’s not rock star growth, but 2% to 2.5% a year is good, and the Fed is being very cautious.

   

  More importantly, businesses are still hiring. Over 2.3 million jobs were added last year (the latest data on hiring comes out Friday and it’s widely expected to show more jobs added).

  Pay no attention to the fact that last week not a single cargo ship was transporting raw materials in the South China Sea, the first time in history that it has happened. The economy is is great shape and this is not proof that global commerce has literally stopped.

  Worry not that Walmart, Macy’s and scores of other retailers had an abysmal holiday season and are now set to lay off tens of thousands of workers. Unemployment, when calculated using models that were used during the Great Depression and that were defined out of existence by the government in 1994 show that some 23% of Americans are out of work. But we don’t calculate like that anymore, so we actually have an employment rate of about 95% in America right now.

  And though the economy is officially growing at 2.5% per year based on the government’s trustworthy data, we should absolutely not look at the inflation numbers, which according to Shadow Stats are running about 4% per year. If we did, however, go totally fringe and consider inflation within the context of the economy we might notice that this purported growth is actually negative 2% if not worse.

  In fact, we’re doing so well that just 45 million of America’s population of 320 million people are on food stamps right now. By all accounts, a really good sign of not just economic growth, but more jobs and an increase in personal incomes.

  And with oil trading at under $30 per barrel, we can see nothing but blue skies going forward because, hey, we’re all paying a dollar less for gas now. We’re sure this will have no effect on the domestic real estate market in places like Texas and North Dakota. Nor will this collapse in oil prices cause debt burdened domestic oil companies to close up shop, potentially leading to a domino affect across the entirety of the U.S. economy. Nor will it have any impact on periphery businesses that service those companies, including all of those restaurants that saw below-minimum wage job growth explode last year.

  You have absolutely nothing to worry about. The notion that an economic and financial catastrophe of historic proportions is playing out right before our eyes is the fantasy of internet conspiracy fanatics.

  At this point, we encourage our readers to take no action to prepare for the coming calamity, because there is no coming calamity.

  Carry on. Everything is awesome. It really is different this time.

  

  

  

  

  

• When Omnipotence Fails: JPMorgan Warns Upside Uncompelling As Central Bank Put Wanes

  JPMorgan shifts to the dark-side…

  It would be hard for a year to start any worse than 2016 has.
   

  

  The SPX is now off >8% YTD and has slumped ~10% from the late-’15 high of ~2080.  Chinese uncertainty (although more institutional than economic at this point vs. the opposite back in Aug), evidence of slowing domestic growth (JPM took its Q4:15 GDP forecast to +0.1%), trimmed earnings estimates (~$125 was being penciled in for this year back in Q4:15 but that is now $120 and falling), full multiples, and the absence of credible monetary policy responses (all the Fed will do is nothing which isn’t particularly impressive) are all conspiring to hit stocks and smoother sentiment (also the extremely uncertain US presidential election outlook is a big underappreciated headwind).

  Prices are oversold and sentiment hasn’t been this despondent in a long time (even Aug/Sept wasn’t this palpably negative) but any bounce will not be particularly impressive and in a lot of ways that is the main problem as the upside just isn’t compelling enough to make a major stand ($120 and 16x gets the SPX only to 1920 and at this point those are “best case” scenarios).  Enormous P&L destruction coming so early in the year, following the poor performance numbers from last week, has only made sentiment more miserable.  The fact we are in the middle of a news vacuum doesn’t help as it allows single data points (such as CSX’s “things haven’t been this bad outside of a recession” comment) to color the whole market (the CQ4 earnings season is always more spread out and so investors won’t hear from the all the S&P 50 CEOs until Feb).  However, just because the SPX won’t hit new highs doesn’t mean it will collapse either and there is something to be said for the fact that the index hasn’t made any progress for 18 months.  The extremely gloomy predictions of bear markets (down ~20% from the recent ~2100 high would imply a ~1680 SPX) or 2008-like catastrophes seem overdone.
   
  Top headlines/trends/themes from the week (in order of importance)

  The big overhang is growth, not China.  Obviously the CNY/CNH volatility has harmed sentiment and contributed to financial market volatility and China’s years-long economic slowdown is having global effects.  But while China gets most of the headline blame, the more important driver behind the YTD slump in US equities is signs of economic softness.  Q4:15 GDP estimates have been bleeding lower for months and are now sub-1% for many people.  The slight miss in Dec auto sales, coupled w/the caution from AutoNation, was prob. the single most important financial market development so far in 2016 outside of China – autos have been a mainstay of US economic growth for years, prob. the shining light of the post-crisis recovery, and if it were to weaken a major pillar of support would be removed.  Meanwhile the industrial economy is suffering enormous headwinds, many of them related to the carnage in energy (two industrial-levered firms, CSX and FAST, used the “recession” word on their earnings calls this week).  The consumer ostensibly has a number of tailwinds (jobs, housing, gas, etc) but isn’t acting as a particularly strong economic driver at the moment.  The bank earnings in aggregate were solid (from a macro perspective) but investors will need to hear from more CEOs in additional industries to bolster confidence in a ~$120 EPS number for 2016 (for the SPX).  In all likelihood the US economy will continue along at the same middling pace its witnessed since the financial crisis, varying somewhat quarter-to-quarter but w/an annual growth rate that doesn’t deviate much from 1.5-2.5% (US GDP: +2.5% ’10, +1.6% ’11, +2.2% ’12, +1.5% ’13, and +2.4% ’14; the St is modeling +2.4% for both ’15 and ’16).  JPMorgan’s M Feroli cut his Q4:15 GDP estimate from +1% to +0.1% on Fri in the wake of the retail and inventory report and took Q1:16 from +2.25% to +2% but stayed at +2.25% for Q2-4

   

  It’s not 2008.  It’s not 2010 either.  The key transmission mechanism through which macro problems become systemic events is the banking system but capital levels are extremely healthy now (in contrast to 2006-2008) and thus banks aren’t at risk of being compromised.  However, that doesn’t mean the outlook for risk assets is spectacular as the country remains later in its economic and corporate recovery cycle and multiples are fuller than they’ve been. 

   

  Multiples and earnings math suggest any bounce will be a shallow one.  The key for this tape remains the same – earnings and multiples.  The ’16 SPX EPS estimate has been bleeding lower for months, falling from ~$125 late in ’15 to ~$120 earlier this week (and some are few dollars below that).  The sanguine macro commentary from bank mgmt. teams this week was nice to hear but it will take similarly positive language from other Dow Jones-caliber CEOs to bolster confidence in $120.  As earnings forecasts were trimmed, multiples also were brought lower and whereas last year people could use $125 and 17x to justify ~2100+ for the SPX, at this time 16x is considered a ceiling for the time being (which means on a $120 EPS number the SPX at 1920).

   

  China gets blamed for a lot more than it should.  China continues to undergo a massive, complicated, and unprecedented (for them) transition away from an economy focused on manufacturing and exports and towards one dependent more on consumer consumption and services.  Meanwhile, the anti-corruption campaign (which President Xi this week pledged to sustain), efforts to clamp down on pollution, and a slowing in general economic momentum all create added challenges for this transition.  The lack of specific clarity from the government about its intentions (see the vague aphorisms and platitudes from the PBOC and other gov’t institutions on a daily basis) only makes it more difficult for investors to form a confident view on China’s outlook.  The currency vicissitudes are just one small example of the undermining uncertainty emanating from China – Beijing pledges to give markets a greater say in FX markets but intervenes heavily in the offshore market to stem CNH declines; it pledges to hold the yuan “balanced and level” but aggressively fixes the CNY lower; it shifts to a new reference basket w/o providing details on the member weights; etc.  The stock market machinations (introducing new circuit breakers before quickly canceling them; coercing funds to refrain from selling; etc) are a whole other problem.  The actual growth figures have been decent of late (including this week’s trade numbers) but this has had little effect on sentiment as institutional doubts grow larger.  Despite all the skepticism though investors need to appreciate that China’s policy apparatus is still relatively immature and not necessarily as precise and deliberate as is the case in more advanced economies.

   

  Oil remains a big problem.  The oil price decline is wreaking havoc everywhere, skewing data, and sowing uncertainty.  Global oil markets remain in a structural oversupply condition, something that doesn’t show many signs of ending.  OPEC is still uncoordinated and stepped up Iranian supply is about to come to market (the nuclear sanctions could wind up getting lifted any day).  US shale producers are experiencing enormous financial pain and bankruptcies are rising but supply destruction isn’t taking place fast enough to bring global markets into balance.  While demand conditions aren’t helping, the bigger problem for crude remains massive oversupply.  Despite the unfavorable supply backdrop though, the enormous volatility with which prices are swinging daily clearly is a function much more of financial flows and not changes in underlying fundamental conditions.  The historical playbook considers falling oil a clear economic positive but that doesn’t seem to be the case today.  To start, the US is now a major global producer and as such the domestic industry accounts for a lot of employment and capital spending.  Meanwhile, the behavior of the consumer has clearly changed and the massive oil dividends are being saved, not spent.  In addition, energy-linked companies were enormous issuers of equity and esp. debt over the last several years and the value destruction incurred by a lot of this paper is having real economic effects.  Finally, inflation expectations globally are underpinned to a large degree by oil and thus break-even measures (and lately survey-based measures of inflation too) have declined.

   

  Earnings – the CQ4 reporting season is too young to draw any firm conclusions but results from the one group w/a relatively large sample-size (the banks) were (mostly) encouraging.  Investors were nervous about the banks for a few reasons but in particular concerns about a crushing increase in energy-related credit provisions have hit the group hard in the last several weeks.  While provisions did tick higher for many due to commodity-related exposure (and NPAs/non-accruals weakened too), credit quality overall was very strong (and for the large money centers and regional banks energy lending remains small as a percent of their total loan books).  The other main macro indicator, loan growth, was healthy in Q4 as well.  In tech, TSMC and INFY both were solid (esp. INFY) while INTC underwhelmed (Data Center revs fell a bit short of expectations and mgmt. was a bit more cautious on the outlook for the core INTC business).  The industrial indications still point to a very tough operation environment (both CSX and FAST talked about conditions being recession-like).

   

  The US presidential election isn’t helping stocks.  Lurking in the background is the approaching US presidential election as the collapse in Clinton’s poll numbers of late raises the prospect of a Sanders vs. Trump or Cruz contest, something that isn’t helping sentiment.

  And finally – perhaps most importantly – Western central banks attempt to mollify sentiment with dovish rhetoric but to no avail.

  The BOE liftoff expectations get pushed back.  The ECB expresses a desire to do more should conditions warrant (as per the minutes out this week).  And a variety of Fed officials pour cold water on FOMC’s own current four hike guidance (although Dudley on Friday didn’t sound too worried about the macro environment).  The evolution in CB rhetoric isn’t particularly surprising and investors weren’t all that impressed regardless – monetary policy isn’t being looked to as a savior for the tape’s current travails. 

   

  For the Fed specifically, the market never endorsed the “four hike” guidance and even before the YTD break-down in equities investors were anticipating no more than two additional moves in ’16 (and that two is quickly moving to one or zero).   The ECB could very well “do more” but prob. not for a few months (they just acted and keep in mind that decision was somewhat controversial internally). 

   

  Central bank policy overall is extremely accommodative and will stay that way for a long time but increasingly central banks are moving into the background as a driver for the tape’s narrative.

  Source: JPMorgan

  

  

  

  

  

• How Did Americans Get So Fat, In Seven Charts

  Americans are fat. They are so fat very few would even bother to click on a hyperlink in this article explaining how fat they are, so instead we will present an animated chart showing the severity of the US obesity problem over the past 30 years.

  

   

  Cartoons aside, here are the facts: today two-thirds of U.S. adults are overweight or obese. Half are afflicted with chronic conditions like diabetes or high blood pressure that can often be prevented with better diets, but aren’t and as a result debt-funded healthcare costs have exploded, and while this chronic obesity has made pharma companies richer beyond their wildest dreams, it means future US healthcare spending and welfare obligations are unsustainable.

  America didn’t get this way overnight. The average calories available to the average American increased 25 percent, to more than 2500, between 1970 and 2010, according to data from the U.S. Department of Agriculture. There was no extra meal added to the day, instead an evolution in the type of foods Americans eat led to steady growth in calories.

  Added fats and grains account for a growing share of total caloric intake. These two categories, which include oils and fats in processed foods and flour in cereals and breads, made up about 37 percent of our diet in 1970. By 2010, they were 46 percent—a larger share of the growing pie. One of the main factor: cost; the increasingly more caloric foods become progressively cheaper and more affordable. The result: more of the lower and middle classes gravitated toward it, leading to the epidemic shown above.

  Here, courtesy of Bloomberg, are seven charts showing the detail behind America’s troubling obesity trend.

  First, this is where America’s calories come from.

  

  Cheese is replacing milk.

  

  A lot more fat goes into our foods.

  

  Calories from wheat, rice, and corn have increased. This includes refined grains like white bread that provide calories but are stripped of much of the nutrients in whole grains.

  

  There are some indications that Americans are changing their diets to become healthier. For example, we’re swapping red meat for chicken.

  

  And though corn syrup boomed since the 1970s, the total amount of sweeteners we eat has declined. That’s partly because Americans are drinking less soda.

  

  These positive changes haven’t negated the overall increase in calories on our plates. More than two-thirds of U.S. adults are overweight or obese, compared to less than half in the 1970s.

  

  The government’s dietary guidelines are simple: “Almost all people in the United States could benefit from shifting choices to better support healthy eating patterns.” Right, now if only the government would also subsidize this healthy – which means more expensive – eating. We won’t hold our breath: after all the massive pharma lobby would generate far less profits for its clients if US obesity were to sharply decline as a result of someone doing the right thing.

  So until something does take place to shock the US out of its fatty momentum, here is Family Guy.

  

  

  

  

  

• The Map That Will Change The Way You See The World

  How do you view your country relative to others? Chances are if it’s based on most world maps, your view is distorted.

  As the world turns its gaze to the rich and pretty people in Davos this coming week, The World Economic Forum unleashed the following cartogram, created by Reddit user TeaDranks, that could change your entire perception of the world. Cartograms scale a region’s geographic space according to a particular attribute and in this case each square now represents 500,000 people.

  (click image for massive legible version)

  

   

  We all know that India and China have large populations, but this map emphasises their size on a global scale. Compared to conventional world maps, the two Asian powerhouses dominate. Along with several East Asian neighbours – Bangladesh, Japan, the Philippines and Indonesia – their contribution to the global population is clear.

  The size of Nigeria and Brazil compared to the rest of Africa and Latin America is equally apparent.

  The map also effectively highlights the contribution of cities and regions to total populations. For example, the greater Tokyo region accounts for a significant proportion of Japan’s overall population. Equally, Delhi, Shanghai and Mumbai all occupy areas larger than many European nations.

  At the other end of the scale, some economies which are barely visible on traditional world maps appear much larger on the cartogram. Consider the cases of Hong Kong and Taiwan, whose relatively large populations compared to their geographical sizes see them feature much more prominently.

  Conversely, some countries which are very large on conventional maps can barely be seen. Canada, Russia and Australia are much smaller in TeaDranks’ representation, which was inspired by Paul Breding’s 2005 work. Canada in particular disappears almost entirely.

  Source: WEForum.org

  

  

  

  

  

• How QE Crushes The Real Economy & Why The Secular Low In Treasury Yields Lies Ahead

  The economy was supposed to fire on all cylinders in 2015. Sufficient time had passed for the often-mentioned lags in monetary and fiscal policy to finally work their way through the system according to many pundits inside and outside the Fed. Surely the economy would be kick-started by: three rounds of quantitative easing and forward guidance; a record Federal Reserve balance sheet; and an unprecedented increase in federal debt from $9.99 trillion in 2008 to $18.63 trillion in 2015, a jump of 86%. Further, stock prices had gained sufficiently over the past several years, thus the so-called wealth effect would boost consumer spending. But the economic facts of 2015 displayed no impact from these massive government experiments.

  Excerpted from Lacy Hunt and Van Hoisington's Q4 2015 Review & Outlook…

  Since the introduction of unconventional and untested monetary policy operations like quantitative easing (QE) and forward guidance, an impressive amount of empirical evidence has emerged that casts considerable doubt on their efficacy.

  Central banks in Japan, the U.S. and Europe tried multiple rounds of QE. That none of these programs were any more successful than their predecessors also points to empirical evidenced failure.

  On QE's Utter Failure (or  Why QE Hurts More Than It Helps)

  This empirical data notwithstanding, a causal explanation of why QE and forward guidance should have had negative consequences was lacking. This void has now been addressed: Quantitative easing and zero interest rates shifted capital from the real domestic economy to financial assets at home and abroad due to four considerations:

  • First, financial assets can be short-lived, in the sense that share buybacks and other financial transactions can be curtailed easily and at any time. CEOs cannot be certain about the consequences of unwinding QE on the real economy. The resulting risk aversion translates to a preference for shorter-term commitments, such as financial assets.
  • Second, financial assets are more liquid. In a financial crisis, capital equipment and other real assets are extremely illiquid. Financial assets can be sold if survivability is at stake, and as is often said, “illiquidity can be fatal.”
  • Third, QE “in effect if not by design” reduces volatility of financial markets but not the volatility of real asset prices. Like 2007, actual macro risk may be the highest when market measures of volatility are the lowest. “Thus financial assets tend to outperform real assets because market volatility is lower than real economic volatility.”
  • Fourth, QE works by a “signaling effect” rather than by any actual policy operations. Event studies show QE is viewed positively, while the removal of QE is viewed negatively. Thus, market participants believe QE puts a floor under financial asset prices. Central bankers might not intend to be providing downside insurance to the securities markets, but that is the widely held judgment of market participants. But, “No such protection is offered for real assets, never mind the real economy.” Thus, the central bank operations boost financial asset returns relative to real asset returns and induce the shift away from real investment.

  …

   

  It is quite possible that corporate decision makers do not understand the relationships that cause QE and forward guidance to redirect resources from real investment to financial investment. It is also equally likely these executives do not understand that this process reduces economic growth, impairs productivity and hurts the rise in wage and salary income. But, does a lack of understanding of economic theory by key market participants render the causal relationships invalid?

   

  Spence and Warsh elegantly argue corporate executives do not need to know these fundamental relationships. Here is their key passage: “Market participants may not be expert on the transmission mechanism of monetary policy, but they can deduce that the central bank is trying to support financial asset prices. The signal provided by central banks might be the essential design element.” Real assets market participants simply need to know that the central bank does not offer such protection. In other words, the corporate managers merely need to realize that one asset group is protected and the other is not.

  On Monetary Policy's Endgame…

  Our assessment is that monetary policy has no viable policy options that are capable of boosting economic activity should support be needed. In fact, the options available to the central bank, at this stage, are likely to be a net negative.

   

  …

   

  The extremely high level of debt suggests that the debt is skewed to unproductive and counterproductive uses. Debt is only good if the project it finances generates a stream of income to repay principal and interest. There are two types of bad debt: (1) debt that does not generate income to repay interest and principal (Hyman Minsky, “The Financial Instability Hypothesis”); and (2) debt that pushes stock prices higher without a commensurate rise in corporate profits (Charles P. Kindleberger, Manias, Panics and Crashes).

  On Treasuries…

  With the trajectory in the nominal growth rate moving down, U.S. Treasury bond yields should work lower, thus reversing the pattern of 2015 and returning to the strong downtrend in place since 1990.

   

  …

   

  The firm dollar will remain a restraining force on economic activity and should cause the year-over-year increase in the CPI to reverse later in the year. Under such circumstances, lower, rather than higher, inflation remains the greater risk. Such conditions are ultimately consistent with an environment conducive to declining long-term U.S. Treasury bond yields. In short, we believe that the long awaited secular low in long-term Treasury bond yields remains ahead.

  Full must-read letter…

  Hoisington Q4

  

  

  

  

  

• Iran Sanctions Lifted As Nuclear Deal Implemented, US Hostages Freed

  #ImplementationDay–I thank God for this blessing & bow to the greatness of the patient nation of Iran. Congrats on this glorious victory!

  — Hassan Rouhani (@HassanRouhani) January 16, 2016

  U.S. + EU will begin lifting nuclear-related sanctions, expanding the horizon of opportunity for the Iranian people.

  — John Kerry (@JohnKerry) January 16, 2016

  Today marks the moment the #IranDeal has transitioned from ambitious promises on paper to measurable actions in practice.

  — John Kerry (@JohnKerry) January 16, 2016

  We’re getting to #ImplementationDay. Nothing serious. Diplomacy requires patience, but we all know that it sure beats the alternatives.

  — Javad Zarif (@JZarif) January 16, 2016

  Just days after two US Navy boats and ten sailors were seized at Farsi Island ahead of President Obama’s state-of-the-union address and just days before Tehran will see international sanctions lifted as part of the “historic” nuclear accord, four US hostages have been freed in a prisoner swap between Washington and Tehran.

  Among the detainees is Washington Post reporter Jason Rezaian who was famously held for spying after being convicted in a shadowy trial last year and faced up to 20 years in an Iranian prison.

  

  According to FARS, Iran also freed Marine veteran Amir Hekmati and Christian pastor Saeed Abedini, who had been held on a variety of charges.

  “All four are duel U.S.-Iranian citizens, according to the semiofficial Mehr and Fars news agencies,” WaPo notes, adding that “news of the exchange came as world leaders converged [in Vienna] on Saturday in anticipation of the end of international sanctions against Iran in exchange for significantly curtailing its nuclear program.”

  Foreign Minister Mohammad Javad Zarif was brimming with optimism when he arrived [in Vienna] earlier in the day and met with Federica Mogherini, the European Union’s foreign policy chief,” WaPo says.

  “This is a good day for the Iranian people . . . and for the world,” Zarif proclaimed. “What is going to happen today is proof . . . that major problems in the world could be tackled through dialogue, not threats, pressures and sanctions.”

  “International sanctions on Iran will be lifted on Saturday when the United Nations nuclear agency declares Tehran has complied with an agreement to scale back its nuclear program,” Reuters writes, adding that “‘implementation day’ of the nuclear deal agreed last year marks the biggest re-entry of a former pariah state onto the global economic stage since the end of the Cold War, and a turning point in the hostility between Iran and the United States that has shaped the Middle East since 1979.”

  The IAEA is reportedly set to issue a report that confirms Iran has complied with its commitments under the agreement struck last summer. That report will trigger the lifting of sanctions and the return of Iran to the world stage. A joint statement is expected later today.

  This comes as US lawmakers push for fresh sanctions on Tehran in connection with two ballistic missile tests the Iranians carried out in October and November, and just weeks after an “incident” in the Strait of Hormuz saw the IRGC conduct a live-fire rocket test within 1,500 yards of a US aircraft carrier.

  The deal has ruffled more than a few feathers in Riyadh, where the P5+1 agreement has stoked fears that America’s rapprochement with the Iranians marks a shift in US Mid-East policy that could endanger the regional balance of power at a time when relations between the Sunni and Shiite powers have deteriorated markedly. As an aside, Zarif is trolling the Saudis on Twitter as we speak:

  #ImplementationDay, it’s now time for all—especially Muslim nations—to join hands and rid the world of violent extremism. Iran is ready.

  — Javad Zarif (@JZarif) January 16, 2016

  Summing up Saturday’s proceedings in Vienna:

  

  *  *  *

  From FARS

  “Based on an approval of the Supreme National Security Council (SNSC) and the general interests of the Islamic Republic, four Iranian prisoners with dual-nationality were freed today within the framework of a prisoner swap deal,” the office of Tehran prosecutor said.

  Jason Rezaian, Amir Hekmat, Saeed Abedini and a fourth American-Iranian national who were jailed in Iran on various charges in recent years have all been released.

  According o the swap deal, the US has also freed 6 Iranian-Americans who were held for sanctions-related charges..

  A senior Iranian legislator citing an IRGC report on Rezaian’s case said in October that he has been imprisoned for his attempts to help the US Senate to advance its regime change plots in Iran.

  In late July 2014, Iran confirmed that four journalists, including Washington Post correspondent Jason Rezaian, had been arrested and were being held for questioning.

  Rezaian’s wife Yeganeh Salehi, a correspondent for the United Arab Emirates-based newspaper, the National, was also arrested at that time, but she and two others were released later.

  According to the Constitution, the Judiciary is independent from the government in Iran.

  Some reports earlier this year had spoken of a potential prisoner swap between Iran and US following the Vienna nuclear deal in July.

  

  

  

  

• President Obama's Iran Policy Explained (In 1 Cartoon)

  “Hands Up… Don’t Nuke”?

   

  

   

  Source: Investors.com

  

  

  

  

  

• Too Many "Think Tanks" Are Just Kool-Aid Fueled Group-Think

  Authored by Mark St.Cyr,

  The morning routine for many over the last few weeks suddenly has had a peculiar fly in the ointment added to the day’s ensuing narrative. First: how is it that “everything is awesome” has suddenly turned many a 401K balance into WTF status. And second: why is it when they return home the TV no-longer seems to shout how the mornings plunge in stock prices was met with a near immediate BTFD (buy the dip) rally erasing any and all previous losses with gains? Suddenly it seems things are quite different.

  Yes, indeed – they truly are.

  For the last 5+ years the above has been the dispensed conditioning reminiscent of Pavlov’s canines of not only many a next-in-rotation fund manager, but also, the next in rotation so-called “smart crowd” guest from some well named “think tank” appearing within the various outlets of not only the financial programs, but rather, throughout the main stream media in total.

  Over the last 5 years the various Fed. QE (quantitative easing) interventions into the capital markets has facilitated dumb luck trading into “genius” status, and no clue analysis into “spot on brilliant” prognostications. The real issue at hand is many believed their own press, and the current state of egg on their face would make many a Denny’s™ blush. As bad as that sounds – it gets worse.

  The other day I was viewing a program where the guest was the president of one of the well-known, prominent, “think tank” (TT) institutes. (I’m not trying to be coy in not naming, it just doesn’t matter, for its more of a cabal than any one singular.) These TT’s are where policy members whether it would be Federal Reserve officials past or present, along with lawmakers and other central bankers from across the globe will speak among themselves (or dispense advice) and ruminate about monetary policy, its effects, and so on. And yes, far, far more.

  Supposedly this is where the “thinking” gets exercised within the peer group for efficacy before, and possibly during, any implementation phase that might arise. One would think this is where a robust dialogue of differing ideas would be present. Alas, it would seem far from it. For if what I witnessed when listening to an argument as to why or, why not the current market gyrations are showing obvious warning signs that need to be heeded. The prevailing rationale and thoughts to my ear resembled more around illogical or, spurious group think, as opposed to anything resembling a tank where “great minds think alike” would gather.

  On the table front and center was the topic of China and their current stock market malaise. Also, within the conversation was a two-part topic concerning The Fed. There was the question as to whether or not the current rate hike has inflamed the current melt down we’re witnessing in Chinese markets. But also, the topic of whether or not the “Audit the Fed.” initiative recently voted on was a valid issue. Whether or not you agree or disagree with the audit bill is for you to decide. However, the issue that took me completely off-guard were the arguments made against it and the examples used. From my perspective this was a brief moment of clarity when one could get a glimpse of just how delusional or decoupled from reality these TT’s have become. Ready?

  (I had just taken a mouthful of coffee when these was delivered. So, if you might be doing something similar, may I warn you – put it down first before reading the next few sentences.)

  In response to China and whether they have a debt problem the retort was : “China doesn’t have a debt problem – they have a stock problem.”

  In response to the “audit” issue: “It’s The Fed. that has saved this economy, and just look at the $Billions it recently paid to the treasury.”

  In response to the consumer: “Consumers are doing quite well.” “Gas (prices) is a boon to retail.”

  In response to employment and the economy: “Jobs are doing great, people just aren’t spending.” “GDP is on the right track.”

  If someone wants to argue or, consider that China doesn’t have a debt problem, maybe you would like to consider purchasing some ocean front property I have in Kentucky. I’ll give you a great deal. Trust me. Or, how about the beneficial argument about how the Fed. has made payments to the Treasury? If you can argue with a straight face and no chuckling what so ever (or else the offer is null and void) how we benefit as a nation emulating a Ponzi type system of money creation and payments – I’ll discount that beach property 10%. Heck, if you can do it; make it 15%. It’ll be worth it from my perspective. Again: trust me.

  As startling as the above responses may be, what’s truly terrifying is although you or I may see the absurdity – the people “in charge” of monetary policy and more are not only of this view-point. Many are guest speakers as well as hand-picked or invited “senior fellows” that perpetuate the narrative and reasoning on why these views and responses to events are either correct or, proper while insinuating: they know best, and all you need to do listen (and/or obey.) Just don’t dare question them. That’s when things get ugly. Not for them – but for you.

  Today, with the markets in turmoil resembling the antithesis of what was touted by the so-called “smart crowd,” this is going to have a far more negative effect on the populace at large than previous iterations. For 5 of the last 7 years since the financial meltdown of ’08 many believed this crowd actually understood or, at the least “had a clue” about what has been transpiring within the global economy by the manifestations created not by just the Fed’s initial intervention into the markets. Rather, that they could control the resulting Frankenstein it created in continuing that intervention.

  During this period it could be seen by anyone willing to put down the Kool-Aid® long ago they could not. Yet. it seems at many of these “institutes” as well as gatherings of “great minds thinking alike” not only was it decided to avert their eyes and brains away from the growing monster, but it seems they decided to go full-Krugman supplying a free-flowing, open bar, endless supply of the punch to any and all takers.

  As the many who believed, as well as listened, (or worse) took advice from this cabal. This weekend is going to have many wondering: Do they open their 401K statement this month? Or, like in 2007-08 toss it to the side and hope (if not pray) that the “experts” really do know what they’re doing. Or, is it different this time?

  My feeling is: not only is it different; the one’s that understood the fragility of this house-of-cards left long ago. While the one’s that remained are in that process. And they aren’t coming back when the shouts of “stocks on sale” hit the airwaves in the coming weeks and months. Just like they didn’t this past holiday season for retailers. Sales don’t matter when the collective mindset has turned from bargain shoppers to – preserving what you’ve got. And the retail numbers are showing just that.

  However, not to be alarmed. For the people who will tell you, “The consumer is fine” will also be the ones surrounded by their compadres in a massive display of “group think” and “great mind brilliance” next week in no other place than Davos Switzerland. For why should the economy or body politic be viewed as having anything less than stories of great success and enlightenment when a party of four’s single night dining bill and subsequent bar tab will probably eclipse exponentially the average Joe’s 2 week vacation tab? That is, if the average person can still afford one to compare it to.

  Besides, do you really want to go on vacation today with all the safety concerns around the globe? Just look at what it’ll take to make these people who tell you “everything is awesome” have to contend with to enjoy theirs. This year it will take 5000 Swiss military to protect this enclave alone. I wonder what that’ll cost them.

  Actually: who cares. After all the most important item at this event will be on-tap, free-flowing, and in endless supply.

  Intellectual brainstorming resulting in pragmatic ideas as to solve the world’s economic crises and other issues you ask? No, silly…

  The Kool-Aid!

  

  

  

  

  

• With Draghi On Deck, ECB Mulls Steps To Solve "Non-Existent" Bond Scarcity Problem

  It’s nearly that time again.

  On the heels of December’s “big disappointment” wherein Mario Draghi cut the depo rate by a “measly” 10 bps and extended PSPP by an underwhelming six months, the ECB meets again next week, and this time around, expectations are low.

  Despite the fact that markets have descended into outright turmoil, the ECB “is very unlikely to change its QE dynamics or cut the deposit rate at the upcoming meeting,” Barlcays says. “The earliest QE tweak opportunity for the ECB is the March meeting, if at all.”

  So assuming Draghi doesn’t immediately push the panic button now that sub-$30 crude is virtually guaranteed to keep the Eurozone mired in deflation, we’ll write next week off when it comes to further cuts to the depot rate of a further extension/expansion of QE.

  That said, we doubt we’ve seen the end of ECB easing especially given what’s currently unfolding in markets across the globe and considering the trajectory for commodity prices. The question now is what options the ECB has considering the fact that each incremental bond purchase brings the central bank ever closer to the endgame wherein Draghi begins to bump up against the issue cap for German bunds and, depending on how long the program is ultimately extended, for Spanish and French bonds as well. That goes double in the event the ECB expands the pace of monthly purchases (i.e. if Draghi both extends and expands the program).

  Here’s a table from Barclays which outlines two hypothetical scenarios. The first assumes PSPP is extended for another six months beyond March 2017. The second assumes a €20 billion expansion in the monthly pace of purchases and no extension of the program’s duration.

  

  As you can see, in either case the ECB hits the threshold (33%) for bunds, implying that expanding and extending the program simply isn’t possible unless the EBC drops the capital key allocation.

  “We think flexibility in potentially moving away from the capital ratio has a more credible chance because it would not have to happen immediately. It will likely be pitched as: if and when we hit the 33% limit in Germany, we might look into allocating the excess in German purchases to other EGBs, still according to ECB key capital rules of the remaining issuers,” Barlcays says, adding that dropping the issue cap would risk running into the CAC problem.

  As for buying more covered bonds, SSAs and ABS, Barclays says the game is about up in those markets. “Liquidity has significantly worsened in asset classes such as covered bonds, agencies, supras and ABS since the launch of the asset purchase programme,” the bank notes. “As a result, the ECB might run out of bonds to buy or just find it difficult to place bonds in these universes in order to achieve its monthly target purchase amount (likely up to €20bn out of €60bn).”

  

  In another sign that purchase eligible assets are indeed becoming scarce, Bloomberg notes that although ECB officials “say monthly purchases of about 1 percent of the bonds outstanding haven’t constricted the market, sales of ‘off-the-run’ securities by some of the region’s biggest issuers argue to the contrary.” Here’s more:

  France’s AFT, which boosted the proportion of sales of such non-benchmark securities to 33 percent last year, the most since 2011, said reopenings of the less-traded debt help “preserve liquidity along the entire curve.” Germany plans to sell more of an off-the-run July 2044 security this year, the Finance Agency said last month.

   

  “The longer QE goes on, the more that the distortion impact can be visible, and you can tackle that through these off-the-run issuance,” said David Schnautz, a director of rates strategy at Commerzbank AG, which acts as a primary dealer in both France and Germany.

   

  Existing benchmark bonds become off the run once they’re replaced by a new similar security in sufficient size. Issuing more of the older bonds, which tend to be less frequently traded and, in today’s environment, tend to carry a higher coupon, helps expand the universe of securities available to national central banks, who carry out QE.

   

  “If you can only buy 33 percent of the benchmark bonds, you won’t hit your monthly purchase target over an extended time period,” Commerzbank’s Schnautz said.

  In other words, scarcity and liquidity are indeed problems, no matter what the Governing Council says. 

  What all of the above suggests is that if the ECB intends to both expand and extend PSPP while maintaining the issue cap and retaining the depo floor constraint, eventually Draghi will need to find more bonds to buy and he’s not going to get to where he wants to be by snapping up a few sub-sovereigns or coaxing out off-the-run issuance in dribs and drabs.

  And so, unless the ECB intends to find itself in a situation where it is forced by PSPP’s many constraints to continually disappoint the market in an environment where low commodity prices are likely to cause inflation to continually undershoot the central bank’s target, it’s just as likely as not that the ECB will move into IG corporates next and from there, it’s full-Kuroda-ahead into stocks.

  

  

  

  

  

  

• The Great Unraveling Looms – Blame The 'Austrians'?

  Submitted by Alasdair Macleod via GoldMoney.com,

  Well, well: who would have believed it. First the Bank for International Settlements comes out with a paper that links credit booms to the boom-bust business cycle, then Britain's Adam Smith Institute publishes a paper by Anthony Evans that recommends the Bank of England should ditch its powers over monetary policy and move towards free banking.

  Admittedly, the BIS paper hides its argument behind a mixture of statistical and mathematical analysis, and seems unaware of Austrian Business Cycle Theory, there being no mention of it, or even of Hayek. Is this ignorance, or a reluctance to be associated with loony free-marketeers? Not being a conspiracy theorist, I suspect ignorance.

  The Adam Smith Institute's paper is not so shy, and includes both "sound money" and "Austrian" in the title, though the first comment on the web version of the press release says talking about "Austrian" proposals is unhelpful. So prejudice against Austrian economics is still unfortunately alive and well, even though its conclusions are becoming less so. The Adam Smith Institute actually does some very good work debunking the mainstream neo-classical economics prevalent today, and is to be congratulated for publishing Evans's paper.

  The BIS paper will be the more influential of the two in policy circles, and this is not the first time the BIS has questioned the macroeconomic assumptions behind the actions of the major central banks. The BIS is regarded as the central bankers' central bank, so just as we lesser mortals look up to the Fed, ECB, BoE or BoJ in the hope they know what they are doing, they presumably take note of the BIS. One wonders if the Fed's new policy of raising interest rates was influenced by the BIS's view that zero rates are not delivering a Keynesian recovery, and might only intensify the boom-bust syndrome.

  These are straws in the wind perhaps, but surely central bankers are now beginning to suspect that conventional monetary policy is not all it's cracked up to be. For a possible alternative they could turn to the article by Anthony Evans, published by the Adam Smith Institute. Their hearts will sink, because Evans makes it clear that central banks are best as minimal operations, supplying money through open market operations (OMOs) on a punitive instead of a liberal basis. Instead of targeting inflation, Evans recommends targeting nominal GDP. Evans's approach is deliberately sound-money-light, on the basis that it is more likely to be accepted than a raw sound-money approach. But he does hold out the hope it will be an interim measure towards sound money proper: initially a Hayekian rather than a Misesian approach.

  Targeting nominal GDP is not a perfect answer. As Evans points out, changes in government spending distort it, and by targeting output, there may be less control over inflation, if control was ever the right word. However, my own researches are generally supportive of Evans's approach to managing the money supply. This is because, logically, nominal GDP, which is impossible to measure accurately by the way, is simply the total amount of money deployed in the part of the economy included in GDP. The reason this must be so is Say's law, the law of the markets, tells us that we produce to consume, and production is balanced by the sum of consumption and savings. Therefore, if new money or bank credit is introduced into the economy, it will temporarily increase both demand and supply for goods, until the spread of rising prices for the goods affected negates the impact.

  In managing the total money supply, a central bank would have to take into account fluctuations in bank credit, and adjust its own operations accordingly. No MPC, no FOMC, and no convoluted analysis of inflation prospects are required. The true Austrian approach is to welcome a corrective crisis as the most efficient and rapid way to unwind malinvestments. Nominal GDP targeting of a few per cent can be expected to soften this process without unduly discouraging it.

  While I support the concept of targeting nominal GDP, Evans's paper is necessarily complicated, written for an audience that denies Say's law. He argues his case on a modified equation of exchange, M+V = P+Y, where M is the growth rate of the money supply, V is the change in its velocity, P is the inflation rate, and Y is the growth rate of output.

  My worry is that the faintest suggestion of sound money policies will be blamed for a developing economic crisis, without being adopted at all. Within one month of the Fed raising the Fed Funds rate by a miniscule 0.25%, it seems the whole world is falling apart. The usual market cheerleaders are now on record of expecting a global crisis to develop, the signs being too obvious to ignore. Markets are over-valued relative to deteriorating economic prospects. Collapsed energy and commodity prices tell their own story. Shipping rates and the share prices of US utilities (including rails and freight) are falling. The days of blaming China for a contraction of world trade are over: the downturn is now far larger and more widespread.

  Decades of accumulated market distortions appear to be on the brink of a great unwind, most of which can be blamed on expansionary monetary policies. If so, the banking crisis of 2008 was a prelude, rather than the crisis itself. The Fed will almost certainly reduce interest rates back to zero, and reluctantly will have to consider imposing negative rates.

  The Keynesians will blame the Fed for a complete policy failure. They will argue in retrospect, as they did following the banking crisis, that the financial and economic crisis of 2016 was made immeasurably worse by the Fed raising the Fed funds rate and not pumping yet more money into the economy at such a crucial time. It's like saying alcoholics must drink more to be cured. The monetarists will simply say that the Fed got it wrong, and that monetarism was not to blame. They will both blame advocates of inflexible sound money.

  The reality is, that by implementing conventional policies on the recommendation of group-thinking macroeconomists, the central banks have dug a hole too deep to escape. Recognition of the merits of Austrian sound money theory will simply expose this reality sooner than later.

  

  

  

  

  

• Exclusive: Dallas Fed Quietly Suspends Energy Mark-To-Market On Default Contagion Fears

  Earlier this week, before first JPM and then Wells Fargo revealed that not all is well when it comes to bank energy loan exposure, a small Tulsa-based lender, BOK Financial, said that its fourth-quarter earnings would miss analysts’ expectations because its loan-loss provisions would be higher than expected as a result of a single unidentified energy-industry borrower. This is what the bank said:

  “A single borrower reported steeper than expected production declines and higher lease operating expenses, leading to an impairment on the loan. In addition, as we noted at the start of the commodities downturn in late 2014, we expected credit migration in the energy portfolio throughout the cycle and an increased risk of loss if commodity prices did not recover to a normalized level within one year. As we are now into the second year of the downturn, during the fourth quarter we continued to see credit grade migration and increased impairment in our energy portfolio. The combination of factors necessitated a higher level of provision expense.”

  Another bank, this time the far larger Regions Financial, said its fourth-quarter charge-offs jumped $18 million from the prior quarter to $78 million, largely because of problems with a single unspecified energy borrower. More than one-quarter of Regions’ energy loans were classified as “criticized” at the end of the fourth quarter.

  It didn’t stop there and and as the WSJ added, “It’s starting to spread” according to William Demchak, chief executive of PNC Financial Services Group Inc. on a conference call after the bank’s earnings were announced. Credit issues from low energy prices are affecting “anybody who was in the game as the oil boom started,” he said. PNC said charge-offs rose in the fourth quarter from the prior quarter but didn’t specify whether that was due to issues in its relatively small $2.6 billion oil-and-gas portfolio.

  Then, on Friday, U.S. Bancorp disclosed the specific level of reserves it holds against its $3.2 billion energy portfolio for the first time. “The reason we did that is that oil is under $30” said Andrew Cecere, the bank’s chief operating officer. What else will Bancorp disclose if oil drops below $20… or $10?

  It wasn’t just the small or regional banks either: as we first reported, on Thursday JPMorgan did something it hasn’t done in 22 quarter: its net loan loss reserve increased as a result of a jump in energy loss reserves. On the earnings call, Jamie Dimon said that while he is not worried about big oil companies, his bank has started to increase provisions against smaller energy firms.

  

   

  Then yesterday it was the turn of the one bank everyone had been waiting for, the one which according to many has the greatest exposure toward energy: Wells Fargo. To be sure, in order not to spook its investors, among whom most famously one Warren Buffett can be found, for Wells it was mostly “roses”, although even Wells had no choice but to set aside $831 million for bad loans in the period, almost double the amount a year ago and the largest since the first quarter of 2013.

  What was laughable is that the losses included $118 million from the bank’s oil and gas portfolio, an increase of $90 million from the third quarter. Why laughable? Because that $90 million in higher oil-and-gas loan losses was on a total of $17 billion in oil and gas loans, suggesting the bank has seen a roughly 0.5% impairment across its loan book in the past quarter.

  How could this be? Needless to say, this struck us as very suspicious because it clearly suggests that something is going on for Wells (and all of its other peer banks), to rep and warrant a pristine balance sheet, at least until a “digital” moment arrives when just like BOK Financial, banks can no longer hide the accruing losses and has to charge them off, leading to a stock price collapse.

  Which brings us to the focus of this post: earlier this week, before the start of bank earnings season, before BOK’s startling announcement, we reported we had heard of a rumor that Dallas Fed members had met with banks in Houston and explicitly “told them not to force energy bankruptcies” and to demand asset sales instead.

  Rumor Houston office of Dallas Fed met with banks, told them not to force energy bankruptcies; demand asset sales instead

  — zerohedge (@zerohedge) January 11, 2016

  We can now make it official, because moments ago we got confirmation from a second source who reports that according to an energy analyst who had recently met Houston funds to give his 1H16e update, one of his clients indicated that his firm was invited to a lunch attended by the Dallas Fed, which had previously instructed lenders to open up their entire loan books for Fed oversight; the Fed was shocked by with it had found in the non-public facing records. The lunch was also confirmed by employees at a reputable Swiss investment bank operating in Houston.

  This is what took place: the Dallas Fed met with the banks a week ago and effectively suspended mark-to-market on energy debts and as a result no impairments are being written down. Furthermore, as we reported earlier this week, the Fed indicated “under the table” that banks were to work with the energy companies on delivering without a markdown on worry that a backstop, or bail-in, was needed after reviewing loan losses which would exceed the current tier 1 capital tranches.

  In other words, the Fed has advised banks to cover up major energy-related losses.
  

   Why the reason for such unprecedented measures by the Dallas Fed? Our source notes that having run the numbers, it looks like at least 18% of some banks commercial loan book are impaired, and that’s based on just applying the 3Q marks for public debt to their syndicate sums.

  In other words, the ridiculously low increase in loss provisions by the likes of Wells and JPM suggest two things: i) the real losses are vastly higher, and ii) it is the Fed’s involvement that is pressuring banks to not disclose the true state of their energy “books.”

  Naturally, once this becomes public, the Fed risks a stampeded out of energy exposure because for the Fed to intervene in such a dramatic fashion it suggests that the US energy industry is on the verge of a subprime-like blow up.

  Putting this all together, a source who wishes to remain anonymous, adds that equity has been levitating only because energy funds are confident the syndicates will remain in size to meet net working capital deficits. Which is a big gamble considering that as we firsst showed ten days ago, over the past several weeks banks have already quietly reduced their credit facility exposure to at least 25 deeply distressed (and soon to be even deeper distressed) names.

  

   

  However, the big wildcard here is the Fed: what we do not know is whether as part of the Fed’s latest “intervention”, it has also promised to backstop bank loan losses. Keep in mind that according to Wolfe Research and many other prominent investors, as many as one-third of American oil-and-gas producers face bankruptcy and restructuring by mid-2017 unless oil rebounds dramatically from current levels.

  However, the reflexivity paradox embedded in this problem was laid out yesterday by Goldman who explained that oil could well soar from here but only if massive excess supply is first taken out of the market, aka the “inflection phase.”  In other words, for oil prices to surge, there would have to be a default wave across the US shale space, which would mean massive energy loan book losses, which may or may not mean another Fed-funded bailout of US and international banks with exposure to shale.

  What does it all mean? Here is the conclusion courtesy of our source:

  If revolvers are not being marked anymore, then it’s basically early days of subprime when mbs payback schedules started to fall behind. My question for bank eps is if you issued terms in 2013 (2012 reserves) at 110/bbl, and redetermined that revolver in 2014 ‎at 86, how can you be still in compliance with that same rating and estimate in 2016 (knowing 2015 ffo and shutins have led to mechanically 40pc ffo decreases year over year and at least 20pc rebooting of pud and pdnp to 2p via suspended or cancelled programs). At what point in next 12 months does interest payments to that syndicate start to unmask the fact that tranch is never being recovered, which I think is what pva and mhr was all about.

  Beyond just the immediate cash flow and stock price implications and fears that the situation with US energy is much more serious if it merits such an intimate involvement by the Fed, a far bigger question is why is the Fed once again in the a la carte bank bailout game, and how does it once again select which banks should mark their energy books to market (and suffer major losses), and which ones are allowed to squeeze by with fabricated marks and no impairment at all? Wasn’t the purpose behind Yellen’s rate hike to burst a bubble? Or is the Fed less than “macroprudential” when it realizes that pulling away the curtain on of the biggest bubbles it has created would result in another major financial crisis?

  The Dallas Fed, whose new president Robert Steven Kaplan previously worked at Goldman Sachs for 22 years rising to the rank of vice chairman of investment banking, has not responded to our request for a comment as of this writing.

  

  

  

  

  

• Was That The Capitulation? Not Even Close

  Is it different this time?

  "Sentiment" – musings of a madding crowd – would suggest 'yes', The Bulls just capitulated (notably more than than in the August collapse)…

  

  h/t @Not_Jim_Cramer

  "Volume" – real traded action of a crowded trade – would suggest 'no' – The Bulls haven't even started selling (no panic here, especially relative to August's collapse)…

  

  h/t @DonDraperClone

   

  Did the "most hated" bull market just became the "least panicked" bear market?

  

  

  

  

  

• Earthquake Economics – Waiting For The Inevitable "Big One"

  Submitted by MN Gordon (via Prism Economics), annotated by Acting-Man.com's Pater Tenebrarum,

  Beyond Human Capacity

  “The United States of America, right now, has the strongest, most durable economy in the world,” said President Obama, in his State of the Union address, on Tuesday night.  What performance metrics he based his assertion on is unclear.  But we’ll give him the benefit of the doubt.

   

  

   

   

  Maybe this is so…right now.  But it isn’t eternal.  For at grade, hidden in plain sight, a braid of positive and negative surface flowers indicate an economic strike-slip fault extends below.  What’s more, the economy’s foundation dangerously straddles across it.

   

  

  Actually, it probably isn’t so – the Atlanta Fed’s GDP Now measure, which has proven surprisingly accurate thus far, indicates that the US economy is hanging by a thread – and the above chart does now yet include the string of horrendous economic data released since January 8.

   

  Something must slip.  A massive vertical rupture is coming that will collapse everything within a wide-ranging proximity.  It is not a matter of if it will come.  But, rather, of when…regardless of what the President says.

  Here at the Economic Prism we have no reservations about the U.S. – or world – economy.  We see absurdities and inconsistencies.  We see instabilities perilously pyramided up, which could rapidly cascade down.  We just don’t know when.

  Comprehending and connecting the infinite nodes and relationships within an economy are beyond even the most intelligent human’s capacity.  Cause and effect chains are not always immediately observable.  Feedback loops are often circuitous and unpredictable.  What is at any given moment may not be what it appears.

   

  Not Without Consequences

  For instance, the Federal Reserve quadrupled its balance sheet following the 2008 financial crisis, yet consumer prices hardly budged.  Undeniably, the Bureau of Labor Statistics’ consumer price index is subject to gross manipulation.  We’re not endorsing the veracity of the CPI.

  We’re merely pointing out policies have been implemented that have massively increased the quantity of money, yet we can still get a hot cup of donut shop coffee for less than a buck.  Obviously, the effects of these policies have shown up in certain assets…like U.S. stocks.  That’s not to say they won’t still show up in consumer prices.  They most definitely will.

   

  

  One should perhaps not be too surprised that most prices are far from declining – even when measured by government methods that are specifically designed to play price increases down in order to lower the growth rates of so-called COLA expenses (and leaving aside the fact that the so-called “general level of prices” is a myth anyway and actually cannot be measured) – click to enlarge.

   

  The point is no one really knows when consumer prices will rapidly rise.  The potential is very real.  Like desert scrub tumbling along a highway edge, one little spark could send prices up in a bush fire.  Moreover, the longer the Fed can seemingly get away with their efforts to inflate in perpetuity, the greater the disaster that awaits us.

  In the meantime, their policies are not without consequences.  Price distortions flourish to the extent they appear normal.  Nevertheless, upon second glance, apparent incongruities greet us everywhere we look.

  The sad fact is an honest day’s work has been debased to where it’s no longer rewarded with an honest day’s pay.  At the same time the positive effects of productive labor, diligent savings, and prudent spending now take a lifetime – or more – to fully manifest.

  Conversely, the negative effects of borrowing gobs of money and taking abundant risks can masquerade as shrewd business acumen for extended bubble periods.

   

  

  Even when deflated by the government’s own flawed “inflation” measurements, real median household income is back to where it was 20 years ago already. This is definitely not a sign of economic progress. In fact, this datum is testament to how much capital has been malinvested and hence wasted due to Fed policy-inspired serial credit and asset bubbles – click to enlarge.

   

  Earthquake Economics

  During an economic boom, particularly a boom puffed up with the Fed’s cheap credit, madmen get rich.  They borrow money at an artificial discount and place big bets on rising asset prices.

  They don’t care they are placing those bets within a dangerous seismic zone.  The rewards are too great.  Eventually asset bubbles always exhaust themselves.  Price movements reverse.  They stop inflating.  They start deflating.

  Subsequently, as the bubble exhales, the risk taking beneficiaries of the expansion are exposed.  The downside, no doubt, is less pleasant than the upside.  Ask U.S. oil shale producers.  Just 18 months ago they were raking in cash hand over fist.  Lenders were tripping over themselves to extend credit for fracked wells.

  But how quickly things change.  Oil prices fell below $30 per barrel on Tuesday.  Break-even costs for many producers are double that – or more.  In other words, lenders and borrowers alike are staring the downside into the face now.

   

  

  Sitting on a powder keg: oil-related debt has experienced staggering growth – reaching a new peak at what appears to be an exceptionally inopportune juncture, to put it mildly.

   

  In fact, according to a report from AlixPartners, North American oil-and-gas producers are losing nearly $2 billion every week at current prices.  Naturally, capital could only be misdirected to this extent under errant central bank policies of mass credit creation.

  Several more slips like this one and the President’s strongest, most durable economy in the world could backslide into recession. On top of that, ‘the big one’ could rupture at any moment.

  

  

  

  

  

• Pro-China Party Falls As Taiwan Elects First Female President In "Historic" Landslide Election

  “We failed. The Nationalist Party lost the elections. We didn’t work hard enough,” Eric Chu said on Saturday before taking a long bow in front of a “thin” crowd of supporters.

  Chu stepped in to become the Nationalist Party (KMT) candidate in Taiwan’s presidential race when his predecessor was deemed too divisive. The island held two elections on Saturday, one for the presidency and one for seats in the national legislature – The Democratic Progressive Party scored resounding victories in both ballots.

  The DPP candidate and former law professor Tsai Ing-wen became the island’s first female president after claiming 56% of the vote in the biggest landslide since the island’s first democratic election twenty years ago. 

  

  Chu only managed to garner 31%.

  

  Tsai will enjoy a friendly body of lawmakers as the DPP won 68 seats in the 113-seat legislature versus 36 for the Nationalists. Previously, KMT held 64 seats and this will be DPP’s first ever majority.

  

  Taiwan has spent eight years under KMT rule and ahead of the ballot, it was readily apparent that voters were ready for a change, with Tsai maintaining a commanding lead in opinion polls:

  

  That, in turn, led Taiwan observers to predict that the legislature would likely fall to DPP as well. “If history is any indication, the KMT may lose its majority in parliament as well, given that for the two occasions when KMT lost the presidential elections (2000 and 2004), it also failed to win the majority of seats against the DPP in parliament,” Goldman wrote, in the days before the election.

  

  The vote raises the specter of conflict with China. “While Tsai has pledged to maintain ties with Beijing, the DPP’s charter supports independence,” Bloomberg notes, before ominously reminding readers that “The Chinese Communist Party passed a law allowing an attack to prevent secession in 2005, when the last DPP president, Chen Shui-bian, sought a referendum on statehood.”

  Underscoring how frosty relations (still) are, sixteen-year-old pop star Chou Tzu-yu had her activities in China suspended by her management company after waving a Taiwanese flag on a South Korean TV program. She was compelled to apologize in a televised address in order to avoid, in AP’s words, “offending nationalist sentiments on the mainland.” 

  “I’m sorry, I should have come out earlier to apologize,” she says, in a statement that sounds like it might have been beaten out of someone who shorted Chinese stocks last summer. “I didn’t come out until now because I didn’t know how to face the situation and the public.” 

  

  “There is only one China,” she adds, staring blankly into the camera before promising to behave going forward. “I am proud I am Chinese. As a Chinese person, while participating in activities abroad, my improper behavior hurt my company and netizens on both sides of the Strait. I feel deeply sorry and guilty. I decided to reflect on myself seriously and suspend all my activities in China.”

  Chou’s predicament was denounced by new President Tsai, who told reporters that “this particular incident will serve as a constant reminder to me about the importance of our country’s strength and unity.” And by “country” she probably doesn’t mean China. 

  “Although Ms. Tsai has vowed to maintain a broadly stable relationship with mainland China, she remains reticent on specific strategies and has remained ambiguous about the ‘1992 consensus’ which has supported the principle of “one China” although each side has been allowed to interpret it differently,” Goldman writes. “Her position has been that this is an option for Taiwan, but not the only one.”

  Still, analysts say Tsai likely won’t move to anger Xi – at least not immediately. 

  “As long as Tsai doesn’t provoke the other side, it’s OK,” one former newspaper distribution agent who attended Tsai’s rally told AP. “Tsai won’t provoke China for sure, but she won’t satisfy its demands,” said George Tsai, a politics professor at Chinese Cultural University in Taipei adds.

  For his part, Chu just can’t seem to figure out where things went awry. “Why has public opinion changed so much? How did our party misread public opinion? Our policy ideas, the people in our camp, the way we communicate with society — are there major problems there? Why did we fail to self-examine and lose power in the central government and lose our legislative majority?,” he asked himself during a concession speech at Kuomintang headquarters.

  The answer to all of Chu’s questions is simple. “The landslide was propelled by anxiety over stagnant wages, high home prices and dissatisfaction with President Ma Ying-jeou’s polices of rapprochement with Taiwan’s one-time civil war foes on mainland China,” Bloomberg writes, summing things up nicely before adding that “Tsai will bear the task of resuscitating an economy expected to have grown last year at its slowest pace since at least 2009.”

  

  The quandary here should be obvious: given the slowdown in mainland demand and the yuan deval, this isn’t exactly the ideal time for Taiwan to be poking China in the eye with a stick.”The election comes at a tricky time for Taiwan’s export-dependent economy, which slipped into recession in the third quarter last year,” Reuters said after the election. “China is Taiwan’s top trading partner and Taiwan’s favourite investment destination.”

  Indeed. Exports to China dropped a whopping 16.4% last month and were down nearly 20% Y/Y in November. Overall, exports fell 13.9% in December and were down 10.6% for the year. Exports to China fell 12.3% in 2015.

  

  

  As for regional security and the ongoing cold war for two chains of islands in the Pacific, AP goes on to say that “Tsai [has] reaffirmed Taiwan’s sovereignty claim over East China Sea islands also claimed by China but controlled by Japan [and] says Taiwan will work to lower tensions in the South China Sea, where it, China and four other governments share overlapping territorial claims.”

  In short then, Tsai has her hands full. She needs to satisfy her base by scaling back ties with China while keeping cross-Strait relations amicable enough to ensure that trade isn’t imperiled at a time when exports are already in free fall. Meanwhile, Taiwan is also mired in the increasingly petulant spat over a series of sparsely populated islands in the region.

  Good luck Ms. Tsai and remember, “Big Uncle” Xi is watching…

  

  

  

  

  

  

• The Deflation Monster Has Arrived

  Submitted by Chris Martenson via PeakProsperity.com,

  As we’ve been warning for quite a while (too long for my taste): the world’s grand experiment with debt has come to an end. And it’s now unraveling.

  Just in the two weeks since the start of 2016, the US equity markets are down almost 10%. Their worst start to the year in history. Many other markets across the world are suffering worse.

  If you watched stock prices today, you likely had flashbacks to the financial crisis of 2008. At one point the Dow was down over 500 points, the S&P cracked below key support at 1,900, and the price of oil dropped below $30/barrel. Scared investors are wondering:  What the heck is happening? Many are also fearfully asking: Are we re-entering another crisis?

  Sadly, we think so. While there may be a market rescue that provide some relief in the near term, looking at the next few years, we will experience this as a time of unprecedented financial market turmoil, political upheaval and social unrest. The losses will be staggering. Markets are going to crash, wealth will be transferred from the unwary to the well-connected, and life for most people will get harder as measured against the recent past.

  It’s nothing personal; it’s just math. This is simply the way things go when a prolonged series of very bad decisions have been made. Not by you or me, mind you. Most of the bad decisions that will haunt our future were made by the Federal Reserve in its ridiculous attempts to sustain the unsustainable.

  The Cost Of Bad Decisions

  In spiritual terms, it is said that everything happens for a reason. When it comes to the Fed, however, I’m afraid that a less inspiring saying applies:

  

  Yes, it’s easy to pick on the Fed now that it’s obvious that they’ve failed to bring prosperity to anyone but their inside coterie of rich friends and big client banks. But I’ve been pointing out the Fed’s grotesque failures for a very long time. Again, too long for my tastes.

  I rather pointlessly wish that the central banks of the world had been reined in by the public before the crash of 2008. However the seeds of their folly were sown long before then:

  

  (Source)

  Note the pattern in the above monthly chart of the S&P 500. A relatively minor market slump in 1994 was treated by the then Greenspan Fed with an astonishing burst of new money creation — via its ‘sweeps” program response, which effectively eliminated reserve requirements for banks .That misguided policy created the first so-called Tech Bubble, which burst in 2000.

  The next move by the Fed was to drop rates to 1%, which gave us the Housing Bubble. That was a much worse and more destructive event than the bubble that preceded it. And it burst in 2008.

  Then the Fed (under Bernanke this time) dropped rates to 0%. The rest of the world’s central banks followed in lockstep (some going even further, into negative territory, as in Europe’s case). This has led to a gigantic, interconnected set of bubbles across equities, bonds and real estate — virtually everywhere across the globe.

  So the Fed's pattern here was: fixing a small problem with a bad decision, which lead to an even larger problem addressed by an even worse decision, resulting in an even larger set of problems that are now in the process of deflating/bursting.  Three sets of increasingly bad decisions in a row.

  The amplitude and frequency of the bubbles and crashes are both increasing. As is the size and scope of the destruction.

  The Even Larger Backdrop

  The even larger backdrop to all of this is that the developed world, and recently China, have been stoking growth with debt, and have been doing so for a very long time.

  Using the US as a proxy for other countries, this is what the lunacy looks like:

  

  As practically everybody can quickly work out, increasing your debts at 2x the rate of your income eventually puts you in the poor house. As I said, it’s nothing personal; it’s just math.

  But somehow, this math escaped the Fed’s researchers and policy makers as a problem. Well, turns out it is. And it’s now knocking loudly on the world’s door. The deflation monster has arrived.

  The only possible way to rationalize such an increase in debt is to convince oneself that economic growth will come roaring back, and make it all okay. But the world is now ten years into an era of structurally weak GDP and there are no signs that high growth is coming back any time soon, if ever.

  So the entire edifice of debt-funded growth is now being called into question — at least by those who are paying attention or who aren't hopelessly blinkered by a belief system rooted in the high net energy growth paradigms of the past.

  At any rate, I started the chart in 1970 because it was in 1971 that the US broke the dollar’s linkage to gold. The rest of the world complained for a bit at the time, but politicians everywhere quickly realized that the loss of the golden tether also allowed them to spend with wild abandon and rack up huge deficits. So it was wildly popular.

  As long as everybody played along, this game of borrowing and then borrowing some more was fun. In one of the greatest circular backrubs of all time, the central banks and banking systems of the developed world all bought each other’s debt, pretending as if it all made sense somehow:

  

  (Source)

  The above charts show how hopelessly entangled the worldwide web of debt has become. Yes, it's all made possible by the delusion that somehow being owed money by an insolvent entity will endlessly prevent your own insolvency from being revealed. How much longer can that delusion last?

  All of this is really just the terminal sign of a major credit bubble — a credit era, if you will — drawing to a close.

  I will once again rely upon this quote by Ludwig Von Mises because apparently its message has not yet sunk in everywhere it should have:

  “ There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

  ~ Ludwig Von Mises

  Well, the central banks of the world could not bring themselves to voluntarily end the credit expansion – that would have taken real courage.

  So now we are facing something far worse.

  Why The Next Crisis Will Be Worse Than 2008

  I’m not just calling for another run of the mill bear market for equities, but for the unwinding of the largest and most ill-conceived credit bubble in all of history. Equities are a side story to a larger one.

  It’s global and it’s huge. This deflationary monster has no equal in all of history, so there’s not a lot of history to guide us here.

  At Peak Prosperity we favor the model that predicts ‘first the deflation, then the inflation’ or the "Ka-Poom! Theory" as Erik Janszen at iTulip described it. While it may seem that we are many years away from runaway inflation (and some are doubting it will or ever could arrive again), here’s how that will probably unfold.

  Faced with the prospect of watching the entire financial world burn to the figurative ground (if not literal in some locations), or doing something, the central banks will opt for doing something.

  Given that their efforts have not yielded the desired or necessary results, what can they realistically do that they haven't already?

  The next thing is to give money to Main Street.

  That is, give money to the people instead of the banks. Obviously puffing up bank balance sheets and income statements has only made the banks richer. Nobody else besides a very tiny and already wealthy minority has really benefited. Believe it or not, the central banks are already considering shifting the money spigot towards the public.

  You might receive a credit to your bank account courtesy of the Fed. Or you might receive a tax rebate for last year. Maybe even a tax holiday for this year, with the central bank monetizing the resulting federal deficits.

  Either way, money will be printed out of thin air and given to you. That’s what’s coming next. Possibly after a failed attempt at demanding negative interest rates from the banks. But coming it is.

  This "helicopter money" spree will juice the system one last time, stoking the flames of inflation. And while the central banks assume they can control what happens next, I think they cannot.

  Once people lose faith in their currency all bets are off. The smart people will be those who take their fresh central bank money and spend it before the next guy.

  In Part 2: Why This Next Crisis Will Be Worse Than 2008 we look at what is most likely to happen next, how bad things could potentially get, and what steps each of us can and should be taking now — in advance of the approaching rout — to position ourselves for safety (and for prosperity, too)

  Click here to read Part 2 of this report (free executive summary, enrollment required for full access)

   

  

  

  

  

  

• Would You Hire It: China's "Resume" Revealed

  After the worst two-week start to US stock trading in history, bulls need some cheering up. So here, courtesy of Citi’s Brent Donnelly, is some levity: this is what China’s Curriculum Vitae would look like if it was applying for a job. It is also a great summary for those who need a simple cheat sheet of where China was, where it is, and where it is going.

  

  So would you hire it?

  

  

  

  

  

• Recession At The Gate: JPM Cuts Q4 GDP From 1.0% To 0.1%

  We already noted the cycle-low Q4 GDP forecast by the Atlanta Fed, which in a release which came out just as the crashing US equity market closed revised the last quarter GDP to just 0.6%, which delay however according to the same Atlanta Fed was due to “nothing more nefarious than technical difficulties.”

  Curiously, JPM had no problems with the 15 second exercise of plugging in raw data into the GDP “beancount” model. And, according to chief economist Michael Feroli, in the 4th quarter, the same quarter in which Yellen finally felt confident enough to declare the US economy strong enough to withstand a rate hike and a tightening cycle, US growth ground to a halt and as a result JPMorgan just cut its Q4 GDP forecast from 1.0% to 0.1%, which would suggest in 2015 US GDP grew 2.3%, down from 2.4% in 2014.

  If JPM is right, and if the US economy effectively did not grow in the fourth quarter, this would make it the worst GDP print since Q1 of 2014, and tied for the third worst quarter since 2009, which incidentally was our kneejerk assessment after yesterday’s latest round of abysmal economic data.

  Another downward revision to GDP: Yellen may have raised rates in a negative GDP quarter

  — zerohedge (@zerohedge) January 15, 2016

  The cherry on top: JPM also cut its Q1 2016 GDP forecast from 2.25% to 2.00%. Expect many more downward revisions to forward GDP in the coming weeks.

  Below is a chart of what US GDP looks like if JPM’s forecast proves to be accurate:

  

  Here is JPM explaining why “Q4 GDP growth is still positive, but barely”

  We are lowering our tracking of real annualized GDP growth in Q4 from 1.0% to 0.1%. Two reports out today contributed to this downgraded assessment. First, retail sales in December came in rather shockingly weak, which was accompanied by modest downward revisions to October and November retail sales. Second, the business inventories report for November suggest a fairly aggressive push by business to reduce the pace of stockbuilding last quarter. We now see inventories subtracting 1.2%-points from growth last quarter, offset by a disappointing but not disastrous 1.3% increase in real final sales.

   

  We are also lowering some our outlook for Q1 GDP growth from 2.25% to 2.0%. While the inventory situation should turn to being roughly neutral for growth, the quarterly arithmetic on consumer spending got a little more challenging after this morning’s retail sales figure, which implies flat real consumer spending in December. We now see real consumer spending in Q1 at 2.5%, versus 3.0% previously. We are leaving unrevised our outlook for 2.25% growth over the remaining three quarters of the year. We will discuss in a separate email the policy outlook, which in any event is currently being swayed more by the inflation data than the growth data.
   
  

  

  

  

  

  

Digest powered by RSS Digest