- The Right To Tell The Government To Go To Hell (In An Age Of Bullies, Censors, And Compliants)
Submitted by John Whitehead via The Rutherford Institute,
“If liberty means anything at all, it means the right to tell people what they do not want to hear.”? George Orwell
Free speech is not for the faint of heart.
Nor is it for those who are easily offended, readily intimidated or who need everything wrapped in a neat and tidy bow. Free speech is often messy, foul-mouthed, obscene, intolerant, undignified, insensitive, cantankerous, bawdy and volatile.
While free speech can also be tender, tolerant, soft-spoken, sensitive and sweet, it is free speech’s hot-blooded alter ego—the wretched, brutal, beastly Mr. Hyde to its restrained, dignified and civil Dr. Jekyll—that tests the limits of our so-called egalitarian commitment to its broad-minded principles.
Unfortunately, our appreciation for a robust freedom of speech has worn thin over the years.
Many Americans have become fearfully polite, careful to avoid offense, and largely unwilling to be labeled intolerant, hateful, closed-minded or any of the other toxic labels that carry a badge of shame today. We’ve come to prize civility over freedom. Most of all, too many Americans, held hostage by their screen devices and the talking heads on television, have lost the ability to think critically.
Societies that cherish free speech relish open debates and controversy and, in turn, produce a robust citizenry who will stand against authoritarian government. Indeed, oppressive regimes of the past have understood the value of closed-mouthed, closed-minded citizens and the power inherent in controlling speech and, thus, controlling how a people view their society and government.
We in the United States have a government with a ravenous appetite for power and a seeming desire to turn the two-way dialogue that is our constitutional republic into a one-way dictatorship. Emboldened by phrases such as “hate crimes,” “bullying,” “extremism” and “microaggressions,” the government is whittling away at free speech, confining it to carefully constructed “free speech zones,” criminalizing it when it skates too close to challenging the status quo, shaming it when it butts up against politically correct ideals, and muzzling it when it appears dangerous.
Free speech is no longer free.
Nor is free speech still considered an inalienable right or an essential liberty, even by those government entities entrusted with protecting it.
We’ve entered into an egotistical, insulated, narcissistic era in which free speech has become regulated speech: to be celebrated when it reflects the values of the majority and tolerated otherwise, unless it moves so far beyond our political, religious and socio-economic comfort zones as to be rendered dangerous and unacceptable.
Consider some of the kinds of speech being targeted for censorship or outright elimination.
Offensive, politically incorrect and “unsafe” speech: Disguised as tolerance, civility and love, political correctness has resulted in the chilling of free speech and the demonizing of viewpoints that run counter to the cultural elite. Consequently, college campuses have become hotbeds of student-led censorship, trigger warnings, microaggressions, and “red light” speech policies targeting anything that might cause someone to feel uncomfortable, unsafe or offended.
Bullying, intimidating speech: Warning that “school bullies become tomorrow’s hate crimes defendants,” the Justice Department has led the way in urging schools to curtail bullying, going so far as to classify “teasing” as a form of “bullying,” and “rude” or “hurtful” “text messages” as “cyberbullying.”
Hateful speech: Hate speech—speech that attacks a person or group on the basis of attributes such as gender, ethnic origin, religion, race, disability, or sexual orientation—is the primary candidate for online censorship. Corporate internet giants Google, Twitter and Facebook are in the process of determining what kinds of speech will be permitted online and what will be deleted.
Dangerous, anti-government speech: As part of its newly unveiled war on “extremism,” the Obama administration is partnering with the tech industry to establish a task force to counter online “propaganda” by terrorists hoping to recruit support or plan attacks. In this way, anyone who criticizes the government online is considered an extremist and will have their content reported to government agencies for further investigation or deleted.
The upshot of all of this editing, parsing, banning and silencing is the emergence of a new language, what George Orwell referred to as Newspeak, which places the power to control language in the hands of the totalitarian state. Under such a system, language becomes a weapon to change the way people think by changing the words they use. The end result is control.
In totalitarian regimes—a.k.a. police states—where conformity and compliance are enforced at the end of a loaded gun, the government dictates what words can and cannot be used. In countries where the police state hides behind a benevolent mask and disguises itself as tolerance, the citizens censor themselves, policing their words and thoughts to conform to the dictates of the mass mind lest they find themselves ostracized or placed under surveillance.
Even when the motives behind this rigidly calibrated reorientation of societal language appear well-intentioned—discouraging racism, condemning violence, denouncing discrimination and hatred—inevitably, the end result is the same: intolerance, indoctrination and infantilism.
Thus, while on paper, we are technically still free to speak, in reality, we are only as free to speak as a government official or corporate censor may allow.
The U.S. Supreme Court has long been the referee in the tug-of-war over the nation’s tolerance for free speech and other expressive activities protected by the First Amendment. Yet as I point out in my book Battlefield America: The War on the American People, the Supreme Court’s role as arbiter of justice in these disputes is undergoing a sea change. Except in cases where it has no vested interest, the Court has begun to advocate for the government’s outsized interests, ruling in favor of the government in matters of war, national security, commerce and speech. When asked to choose between the rule of law and government supremacy, this Court tends to side with the government.
In the 225 years since the First Amendment to the U.S. Constitution was adopted, the rights detailed in that amendment—which assures the American people of the right to speak freely, worship freely, peaceably assemble, petition the government for a redress of grievances, and have a free press—have certainly taken a beating, but none more so than the right to free speech.
Nowhere in the First Amendment does it permit the government to limit speech in order to avoid causing offense, hurting someone’s feelings, safeguarding government secrets, protecting government officials, insulating judges from undue influence, discouraging bullying, penalizing hateful ideas and actions, eliminating terrorism, combatting prejudice and intolerance, and the like.
Unfortunately, in the war being waged between free speech purists who believe that free speech is an inalienable right and those who believe that free speech should be regulated, the censors are winning. Free speech zones, bubble zones, trespass zones, anti-bullying legislation, zero tolerance policies, hate crime laws and a host of other legalistic maladies dreamed up by politicians and prosecutors have conspired to corrode our core freedoms.
If we no longer have the right to tell a Census Worker to get off our property, if we no longer have the right to tell a police officer to get a search warrant before they dare to walk through our door, if we no longer have the right to stand in front of the Supreme Court wearing a protest sign or approach an elected representative to share our views, if we no longer have the right to voice our opinions in public—no matter how misogynistic, hateful, prejudiced, intolerant, misguided or politically incorrect they might be—then we do not have free speech.
What we have instead is regulated, controlled speech, and that’s a whole other ballgame.
Just as surveillance has been shown to “stifle and smother dissent, keeping a populace cowed by fear,” government censorship gives rise to self-censorship, breeds compliance, makes independent thought all but impossible, and ultimately foments a seething discontent that has no outlet but violence.
The First Amendment is a steam valve. It allows people to speak their minds, air their grievances and contribute to a larger dialogue that hopefully results in a more just world. When there is no steam valve—when there is no one to hear what the people have to say—frustration builds, anger grows and people become more volatile and desperate to force a conversation.
The problem as I see it is that we’ve lost faith in the average citizen to do the right thing. We’ve allowed ourselves to be persuaded that we need someone else to think and speak for us. The result is a society in which we’ve stopped debating among ourselves, stopped thinking for ourselves, and stopped believing that we can fix our own problems and resolve our own differences.
In short, we have reduced ourselves to a largely silent, passive populace, content to watch and not do. In this way, we have become our worst enemy. As U.S. Supreme Court Justice Louis Brandeis once warned, a silent, inert citizenry is the greatest menace to freedom.
Brandeis provided a well-reasoned argument against government censorship in his concurring opinion in Whitney v. California (1927). It’s not a lengthy read, but here it is boiled down to ten basic truths:
1. The purpose of government is to make men free to develop their faculties, i.e., THINK.
2. The freedom to think as you will and to speak as you think are essential to the discovery and spread of political truth.
3. Without free speech and assembly, discussion would be futile
4. The greatest menace to freedom is a silent people.
5. Public discussion is a political duty, and should be a fundamental principle of the American government.
6. Order cannot be secured through censorship.
7. Fear breeds repression; repression breeds hate; and hate menaces stable government.
8. The power of reason as applied through public discussion is always superior to silence coerced by law.
9. Free speech and assembly were guaranteed in order to guard against the occasional tyrannies of governing majorities.
10. To justify suppression of free speech, there must be reasonable ground (a clear and present danger) to believe that the danger apprehended is imminent, and that the evil to be prevented is a serious one.
Perhaps the most important point that Brandeis made is that freedom requires courage. “Those who won our independence by revolution were not cowards,” he wrote. “They did not fear political change. They did not exalt order at the cost of liberty.” Rather, they were “courageous, self-reliant men, with confidence in the power of free and fearless reasoning applied through the processes of popular government.”
In other words, the founders did not fear the power of speech. Rather, they embraced it, knowing all too well that a nation without a hearty tolerance for free speech, no matter how provocative, insensitive or dangerous, will be easy prey for a police state where only government speech is allowed.
What the police state wants is a nation of sheep that will docilely march in lockstep with its dictates. What early Americans envisioned was a nation of individualists who knew exactly when to tell the government to go to hell.
- Front Loaded: China, Volatility, and Debt Deflation
Below are some excerpts from our latest macro note, “Front Loaded: China, Volatility, and Debt Deflation.” The full report with the charts and footnotes is on www.kbra.com. The key question raised by the comment is this: Do Chair Yellen and the other members of the Federal Open Market Committee actually believe that there is a positive trade-off between the “benefits” of QE and zero rates and the carnage now unfolding in the global capital markets?
The downside of the social engineering experiment by Ben Bernanke & Janet Yellen is measured in the trillions of dollars, but the benefits seem to be few. Indeed, the only segment of global society that seems to benefit from zero rates and “large scale asset purchases,” to paraphrase Chairman Bernanke, are debtors.
So was this whole exercise with zero rates and purchases of trillions of dollars worth of Treasury and agency securities simply a delaying tactic to avoid deflation and debt liquidation? The FOMC says that QE and ZIRP are all about restoring jobs and growth, but when you examine the situation carefully, it seems hard avoid the conclusion that the Fed’s actions were really about managing a world that is drowning in a sea of uncollectible debt.
Chris
Front Loaded: China, Volatility, and Debt Deflation
Kroll Bond Rating Agency
January 21, 2016
Summary
Kroll Bond Rating Agency (KBRA) believes that the secular shift of asset allocations away from high-yield and leveraged credit, and into more secure government and investment grade credits, will result in lower interest rates as the year progresses – even as the Federal Open Market Committee (FOMC) talks about raising interest rates in its policy guidance.
Increased market volatility results from changes in expectations for global growth and come at the end of Fed bond market market intervention, euphmestically called “quantitative easing.” The credit bubbles in sectors like energy and commodities created during the period of FOMC market intervention must now necesssarily be unwound.
Watching the benchmark 10-year Treasury trade through 2% yield confirms KBRA’s earlier judgement that the bias with respect to market interest rates will remain negative for some time to come – regardless of what the FOMC may say or attempt to do in terms of increasing the cost of short-term funding. Ironically, KBRA believes that short-term benchmark interest rates will remain under downward pressure even as credit spreads widen and the process of remediating distressed credits moves forward.
Discussion
When financial markets began the New Year 2016, comfortable assumptions about financial stability were dashed by strong selling pressure coming from the Chinese equity markets. This outflow by domestic Chinese investors somehow caused a cascade of selling throughout global equity markets. Many analysts have concluded that worries about forward growth prospects in China are the cause of the selling pressure, but we believe that rising debt levels and central bank manipulation of financial markets are also significant drivers of renewed market volatility.
The Fed and other central banks have pursued a policy of purchasing hundreds of billions of dollars’ worth of debt securities, action meant to change investor preferences and, indirectly, result in higher growth and employment. KBRA believes that the end of debt purchases by the FOMC, not only selling in China’s equity markets, is now the chief source of instability in the global financial markets, especially given that most other central banks are easing policy as the Fed attempts to tighten.
The conclusion of Fed securities purchases over a year ago essentially marked the start of a tightening process that has coincided with a sharp decline in demand for commodities and has seen an equally sharp selloff in the high yield debt sector. Former Dallas Fed President, Richard Fisher, describes how the FOMC “front loaded” a rally in financial markets starting in 2009, but now says that the global economy must go through a “digestive period” of lower growth. Fisher specifically opines that one should not blame the equity market selloff on China and that market distortions caused by the Fed are to blame for recent market volatility.
Of note, the just-released 2010 minutes of the FOMC reveal that former Chairman Ben Bernanke unsuccessfully sought to get a consensus to accurately describe QE, namely as “large scale asset purchases.” Mass purchases of assets, it should be recalled, are fiscal activities that traditionally required Congressional authorization. For example, the government purchase of gold in the 1930s was funded by the Reconstruction Finance Corporation, an executive branch agency created by President Herbert Hoover.
The market intervention conducted by the Bernanke and Yellen Feds exceeds the scope of past practice by western central banks, which have become de facto fiscal agencies funded not via the debt markets but by investing moribund bank reserves on deposit with the central bank. Significantly, the real economy has not responded to the Fed’s social engineering experiment. Indeed, since 2013 economic growth has gradually slowed so that as 2016 begins the world economy seems on the brink of entering a recession. Many economists, joined by the International Monetary Fund and Atlanta Fed, have lowered forward growth estimates for 2016 and beyond.
To read the rest of the KBRA research note, go to:
https://www.krollbondratings.com/show_report/3640
- The Fragile Forty & How The World Lost $17 Trillion In 6 Months
It's official. More than 50% of the "wealth" effect created from the 2011 lows to the 2015 highs has been destroyed (despite the world's central banks going into money-printing overdrive over that period). Almost $17 trillion of equity market capitalization has evaporated in just over 6 months with over 40 global stock indices in bear markets…
The U.K. was the latest market to fall 20 percent from its peak, while India is less than 1 percent away from crossing the threshold that traders describe as the onset of bear market. Nineteen countries with $30 trillion have declined between 10 percent and 20 percent, thereby entering a so-called correction, according to data compiled by Bloomberg from the 63 biggest markets on Wednesday.
Emerging nations bore the brunt of the meltdown, accounting for two out of every three bear markets. Slowing Chinese growth, the 24 percent slump in oil this year and currency volatility have driven developing-nation stocks to the worst start to a year on record.
Among equity indexes that are on the cusp of entering bear territory are Australia, India and the Czech Republic, each having fallen about 19 percent from their rally highs. New Zealand and Hungary are putting up the best resistance to the turmoil, limiting their losses to less than 7 percent.
So just before you (Jim Cramer et al.) demand the central banks do more, just remember what reality looks like – will you use any centrally-planned rally to buy moar or sell into as the smoke and mirrors of yet another bubble is exposed with the business cycle inevitably beating the rigging…
- A Simple Warning
We like to consider the longest time periods available to find reliable historical trends in data series. Of these, the price/earnings ratio (p/e ratio) of the S&P 500 index is instructive to study. Major bull markets in equities tend to start from heavily disfavored markets; those with earnings multiples (p/e ratios) in the single digits. In a sense, investors have to give up hope in the stock market before it can regain popularity. In the chart below, you will see that price/earnings ratios around 6 or 7 have preceded long equity bull markets.
Yet, for all the upheaval in the markets over the last 16 years, the US stock market has not yet fallen to single digit p/e ratios. The S&P 500 p/e ratio is currently about 16 and it has been 33 years since the index last traded with p/e below ten. We maintain that this will likely fall this low before the downside of the credit cycle is finished. With earnings now, a single digit p/e would imply an S&P 500 below 1109; a whopping 40% below current levels.
It is important to note that these are glacial processes and we aren't predicting this to happen on any particular schedule, but markets in 2016 have returned to a sense of fear and we just want to remind readers that there is a lot of space between 1870 and 1100 in the S&P 500.
- Soros Reveals He Is Short The S&P 500: Warns China Will Have A Hard-Landing, Says "Fed Hike Was A Mistake"
There’s been no shortage of commentary from market heavyweights this week thanks to the World Economic Forum in Davos, but for anyone who hasn’t yet gotten their fill of billionaire talking heads, George Soros gave a sweeping interview to Bloomberg TV on Thursday, touching on everything from China to Fed policy to Vladimir Putin to Europe’s worsening refugee crisis.
As for China, Soros says he “expects a hard landing,” a contention we won’t argue with considering said hard landing probably arrived a year ago. “A hard landing is practically unavoidable,” he said. “I’m not expecting it, I’m observing it. China can manage it. It has resources and greater latitude in policies, with $3 trillion in reserves.” $3 trillion in reserves which, we might add, are rapidly evaporating.
As for the Fed, Soros is on the policy mistake bandwagon, saying Yellen may have mistimed liftoff. That echoes sentiments voiced by Marc Faber among other prominent investors and speaks to what we’ve been saying since September, namely that December’s hike might go down as the worst-timed rate hike in history. “The investor said he would be surprised if the Federal Reserve raised interest rates again after hiking them in December for the first time in almost a decade,” Bloomberg writes. He, like Ray Dalio, says the FOMC is more likely to cut than hike going forward.
Draghi, Soros thinks, will ease further. No surprise there. This morning we got a bit of dovish jawboning out of the former Goldmanite and it seems likely that the ECB will move again in March given the rather dour outlook for inflation across the euro.
And speaking of inflation (or a lack thereof), Soros warns that deflation has indeed arrived and China, along with falling oil prices and raw materials, are the root causes.
He also voiced concern over the bloc’s refugee crisis and says he’s worried about the political fate of Angela Merkel. The EU, he contends, is falling apart.
Commenting on Vladimir Putin, the billionaire says the Russian President is operating from a position of weakness and thus has to act erratically and take “big risks.”
But the most important point – for markets anyway – came when Soros revealed that he is short the S&P, and long TSYs which again recalls Marc Faber’s take on what’s likely to work during a year in which the US slides into recession. Here was the reaction in equities:
Finally, speaking about the outlook for global growth, Soros says that although he “sees the light at the end of the tunnel,” he “just doesn’t know how to get there.”
Neither do we.
Trade accordingly.
- New Drone Footage Shows Utter Devastation In Syria's Third Largest City
Since the war in Syria entered a new phase in late September with the entry of the Russian air force, we’ve brought you quite a bit of footage depicting the desolation wrought by five years of bloody combat between government forces and the mishmash of rebels battling for control of the country (see here and here).
As Bashar al-Assad put it in an interview with Die Presse, “much of Syria’s infrastructure is destroyed.”
And it isn’t just the infrastructure. Syria has also lost quite a bit of its cultural heritage. For example, the ancient ruins at Palmyra have been partially, well, ruined by Islamic State.
Although we’re quite sure readers are well aware of just how bad things truly are in Syria thanks in no small part to the US-backed effort to bring about regime change in Damascus, it never hurts to remind the public of just how “successful” Washington’s Mid-East foreign policy is and on that note, we bring you the following drone footage of Homs, Syria’s third-largest city.
- Billionaire Blackstone CEO Trolls American Public – Doesn't Get Why People Are Angry
Submitted by Mike Krieger via Liberty Blitzkrieg blog,
DAVOS MAN: “A soulless man, technocratic, nationless and cultureless, severed from reality. The modern economics that undergirded Davos capitalism is equally soulless, a managerial capitalism that reduces economics to mathematics and separates it from human action and human creativity.”
– From the post: “For the Sake of Capitalism, Pepper Spray Davos”
I’ve written several posts examining the dangerous cluelessness inherent throughout the ranks of the oligarch class over the past several years. One of my earliest and most viral pieces was published two years ago and titled, An Open Letter to Sam Zell: Why Your Statements are Delusional and Dangerous. That article was a response to the billionaire’s appearance of CNBC during which he instructed the less financially fortunate to “emulate the 1%,” as if their destitution was a result of personal shortcomings as opposed to egregious structural flaws inherent in the rigged, crony, oligarch-controlled Banana Republic economy billionaires such as himself helped mold. Here’s an excerpt:
Individuals, social classes, even cultures and nation-states develop storylines and so-called “myths” about themselves and how they fit into the bigger picture of current events and human history. We all see ourselves and whatever group(s) with which we identify within a particular social, political and economic context. This is obvious, yet it is much more difficult to look at your owns myths and question them. It is far easier to look at other groups’ myths and heap criticism on them. That is basically all you do.
You think everyone that has issues with you oligarchs and how the 0.01% is destroying our economy and society is simply envious because you assume they think like you do. Certainly, if you were poor you would be envious of the the rich. You’ve made that clear. However, that is not the primary motivation of the anger and resentment swelling up from the underclasses.
Your misdiagnosis of the root cause of the current dissent in America is a result of your obliviousness to the actual concerns of the 99%. A group about which you speak with such certainty, yet certainly know almost nothing about. In fact, my website is dedicated to highlighting all of the destructive trends happening in this nation today. From record high food stamp participation, to declining real wages and the reality that young people need to take on so much debt they become indentured serfs from the moment they enter the workforce. From a loss of 4th Amendment rights due to illegal NSA spying, to the militarization of the police force. From oligarch immunity from serious financial crimes that average citizens would be thrown in jail for life for, to trillion dollar bailouts with zero strings attached for the financial community. From the over-prosecution of some of our bravest citizens such as Aaron Swartz, Barrett Brown and Private Manning to a fraudulent two-party sham political system entirely controlled by your socio-economic class.
In that article, I outlined many of the reasons people are angry and why they should be angry. In fact, I’ve published hundreds of articles every year since early 2012 detailing exactly why the country is in such dire straights. It’s not just me of course, tens of thousands of people across the globe have been doing it for far longer and to much larger audiences. The reason billionaires are incapable of comprehending what’s going on is because doing so would contradict the life-stories they tell themselves about themselves. Make no mistake about it, billionaires think of themselves as truly exceptional people. Privately, they likely muse that their mere presence on earth is nothing short of a glorious gift to humanity from the heavens. These people are deluded, secluded and emotionally stunted in more ways than you could possibly imagine. They have zero capacity for self-reflection.
In our modern world, our culture has become convinced that extreme wealth and power are something to admire, when history shows us time and time again that “the people” must always remain vigilant against the centralization of precisely those two things. Naturally, the people who are centralizing the wealth and power for themselves don’t see the problem with wealth and power centralization. Neither does much of the fawning, inept, and soulless media.
The latest example of oligarch disconnectedness comes, quite appropriately, from Davos. So here’s the quote from Steven Schwartzman, billionaire CEO of private equity giant Blackstone:
“I find the whole thing astonishing and what’s remarkable is the amount of anger whether it’s on the Republican side or the Democratic side,” the Wall Street mogul said at the World Economic Forum in Davos. “Bernie Sanders, to me, is almost more stunning than some of what’s going on in the Republican side. How is that happening, why is that happening?”
Forbes goes on to accurately note that:
America is the richest and most unequal nation in the world — at least when you look at the wealth in 55 of the more conventionally developed countries. Median income has largely fallen behind economic growth as corporations continue to retain a bigger share of the benefits, turning into a reverse of what is usually claimed as the danger of income redistribution.
But whether there are long term changes coming or not of their own accord is immaterial in this case. People in the U.S. don’t tend to think that way. What many perceive now is a basic economic unfairness. They work hard, play by the rules as they’ve learned them, and keep getting further behind. The debt funding for college and large purchases seems to be never ending for large portions of the populace, which cements in a sense of unending inequality.
In a way, Bernie Sanders and the Tea Party are different expressions of the same phenomenon. People disagree over the causes and the proper fixes, but they can find common ground in the sense that things are wrong, that power and wealth are too concentrated, and that most of the country will be left holding the bag when things blow up. That the biggest banks got bailed out of an economic downturn largely of their own creation while the promised help for homeowners largely never materialized didn’t help.
Of course people are angry. It’s one thing to face problems but another to face incompetent greed and manipulation. Unless people climb out of their ivory towers and recognize what is happening on the ground, there will be pain and suffering for all to pay. It’s happened time and again in the past. What makes anyone think that our age is somehow immune?
David Sirota at the International Business Times adds:
On the eve of the conference, the nonprofit group Oxfam released a report showing that the richest 62 people on the planet now own more wealth than half the world’s population. In the United States, recent data from Pew Research shows the average American’s median household worth has stagnated, as the median household worth of upper-class Americans increased 7 percent. Schwarzman, though, expressed surprise that people are enraged.
Yes, you read that right. 62 people own more than 3.5 billion of the earth’s inhabitants. Nothing to see here, move along serfs.
Of course, as I’ve maintained time and time again, this sort of aggregation of wealth only happens in rigged economies. It’s as if the entire Western world has become that Third World oil dictatorship where three guys have billions while the rest of the population eats dirt. I’m sure those dictators also see wonderful, admirable people when they fawn over themselves in the mirror, just as Steven Schwartzman undoubtably does.
Which brings me to my final point: Blackstone. It’s not like Steven Schwartzman is Steve Jobs or Henry Ford, revolutionary entrepreneurs who made their fortunes changing the world and bringing innovative products to people. In fact, you could very easily make the argument that Schwartzman has made much of his fortune by bringing misery to people, or if we want to be generous, hyper rent-seeking from the destruction of the American middle class. Need some proof? Check out the following:
Leaked Documents Show How Blackstone Fleeces Taxpayers via Public Pension Funds
A Closer Look at the Decrepit World of Wall Street Rental Homes
America Meet Your New Slumlord: Wall Street
Poll Time: Which group presents a greater danger to world peace and prosperity?
— Michael Krieger (@LibertyBlitz) January 20, 2016
- Chinese Stocks Face Derivatives-Driven Trigger Of Doom
Despite the collapse in Chinese stocks, Bloomberg reports annual sales of Chinese equity-linked structured notes across AsiaPac rose to a record (prompting Korea's financial regulator to warn investors in August that their holdings had become too concentrated in notes tied to the China H-Shares index). When banks sell the structured products to investors, they take on an exposure that's similar to purchasing a put option on the index… which needs to be hedged via index futures; and if BofAML is right, Chinese stocks in Hong Kong are poised for a fresh wave of selling now that HSCEI has crossed 8,000 as banks are forced to hedge.
[The selling pressure] is because the benchmark Hang Seng China Enterprises Index is approaching a level that forces investment banks to pare back their bullish futures positions, according to William Chan, the head of Asia Pacific equity derivatives research at BofA’s Merrill Lynch unit in Hong Kong. The trades, tied to banks’ issuance of structured products, are likely to start unwinding when the index falls through 8,000, a level it briefly breached on Wednesday. The gauge dropped 1 percent to 7,932.24 at 1:05 p.m. local time on Thursday.
Banks have purchased futures on the gauge of so-called H shares to hedge exposure to structured products that they’ve sold to clients, according to Chan. Many of those products have a “knock-in” feature at the 8,000 level that will spur banks to cut futures positions to maintain the effectiveness of their hedges, he said. Additional pressure points may also come at lower levels, Chan said.
“As the market goes lower from here, the downward move may accelerate,” he said. “There will be a large amount of hedging in futures which dealers need to unwind.”
And it appears that has already begun as not only did stocks accelerate through the "pin" level of 8,000 but Chinese 'VIX' has surged as banks look for alternative ways to hedge their implied positions…
When banks sell the structured products to investors, they take on an exposure that’s similar to purchasing a put option on the index, Chan said.
To hedge against the possibility of a rally, the banks buy Hang Seng China index futures. If the stock gauge falls below knock-in levels for the structured products — the price at which investors begin to lose their principal — the sensitivity of the bank’s position to index swings gets smaller, and banks respond by selling futures to reduce their hedge.
"There will certainly be a build-up of pin risk at given strikes," said Andrew Scott, head of flow strategy and solutions for Asia Pacific at Societe Generale SA in Hong Kong. "But it is clearly very difficult to accurately identify specific key market trigger levels with a great deal of confidence."
Still, if Chan’s scenario plays out, the market could soon come under pressure. A notional $13.6 billion of structured products linked to the H-share measure will get knocked in between levels of 7,000 and 8,000 on the index, and $16.8 billion between 6,000 and 7,000, he said.
It was clear that is what happened yesterday, but how many more are to follow?
- The Next "Significant Risk For The S&P 500" – Kolanovic Reveals "The Macro Momentum Bubble"
Yesterday when we presented Tom DeMark’s latest technical forecast, which anticipates a 5-8% bounce in risk before the next leg lower in equities, we said to “look for the next few days to see if DeMark still has his magic” adding that “we, on the other hand, would rather wait for “Gandalf” Kolanovic’ next take.”
We didn’t have long to wait: moments ago JPM’s head quant, whose uncanny track record of predicting every major market inflection point has been duly documented here, laid out his latest thoughts on the negative feedback loop that is “becoming a significant risk for the S&P 500” but also showed what he thinks is an odd divergence between various asset classes, to wit: “as some assets are near the top and others near the bottom of their historical ranges, we are obviously not experiencing an asset bubble of all risky assets, but rather a bubble in relative performance: we call it a Macro-Momentum bubble.“
His warning: beware the bursting of the macro-momentum bubble.
Here is the latest warning from the man whose every single caution so far has played out virtually as predicted:
Macro Momentum Bubble
In our report last week, we argued that the chance of a bear market is much higher than the market expectation at the time (our estimate ~50% vs. options implying ~25%) and recommended increasing allocations to gold and cash. Over the past week, S&P 500 took another leg lower—and now we believe the market prices a ~50% probability of a bear market. While systematic strategies de-levered more than 2/3 of their exposure (as compared to August/September), market sentiment remains bleak, and there is no obvious catalyst to drive market higher. Short option positions increase market volatility and intraday market moves. The large S&P 500 intraday selloff yesterday was likely driven by gamma hedging (there’s a large put-call gamma imbalance of $25bn per 1%). As we wrote in our report last week, significant short gamma positions are in the 1950-1800 range, and decline below 1800 (on account of put-spreads, where clients are short lower strike puts). As the market fell close to 1800 yesterday, declining gamma near 1800 could have contributed to the sharp intraday reversal.
That was then, and played out just as Kolanovic predicted: here is the latest warning:
At this point we think that the negative feedback loop between market performance, volatility and the real economy (wealth effect) is becoming a significant risk for the S&P 500. To stabilize equities one would need a strong catalyst such as the Fed turning significantly more dovish (or even launching another round of easing). This could put the dollar rally into reverse, stabilize commodity prices and put a floor under the S&P 500. The S&P 500 selloff may also be the catalyst for a momentum– value convergence, which we advocated in our 2016 Outlook (e.g., Oil – Equity convergence).
Going into 2016, many investors were wondering if the monetary easing over the past 7 years inflated a bubble in risky asset prices. The answer to this question depends on which risky asset one looks at. In fact, while some assets are near their peaks of historical price and valuation levels, others are near their lows. Since the last bear market 7 years ago, the S&P 500 is up ~200% and still near all-time high levels. The US Dollar Index (DXY) is also at its highest point in 15 years (since the tech bubble). On the other hand, a large number of risky assets are in the opposite situation: Emerging Market equities, EM Currencies, Commodities are currently trading below levels during great recession of 2008/2009. This unprecedented divergence (more than ~3 standard deviations) is shown in the figure below (also see our 2016 Outlook). Figure 1 shows price of several Momentum assets (S&P 500, S&P 500 Low Volatility Index, S&P 500 Software Index), and Value Assets (EM Currencies – JPM EM FX Index, MSCI Latin America Equities and Commodities – BCOM Index). The left Figure below illustrates that since the onset of the 2008 crisis, the price of Momentum assets increased to 500%, 600%, or even 700% as expressed in units of Commodity prices (BCOM Index, and we observe a similar appreciation in units of EM FX or EM Equities). In summary, as some assets are near the top and others near the bottom of their historical ranges, we are obviously not experiencing an asset bubble of all risky assets, but rather a bubble in relative performance: we call it a Macro-Momentum bubble.
Why do we have this bubble?
Every asset trend starts with fundamental developments. As the US was the first to get out of the global financial crises of 2008-2011 (with Europe and Asia lagging), US assets such as the S&P 500 and USD started outperforming international assets. Divergence between Central Bank policies triggered the USD rally, cross-regional capital flows, and put pressure on EM economies, Commodity prices and Commodity related Developed Market Equity sectors. However, we think that fundamentals were only one of the drivers, and that structural reasons played an equally important (or bigger) role in the creation of this relative performance bubble. These structural drivers are listed and explained below.
Diagram above right shows a hypothetical performance of 2 assets: one with positive momentum and another asset whose price declined below some long-term valuation level. As the price of the trending asset increases, its volatility declines. Similarly, the volatility of the ‘value’ asset increases as the price moves lower. Based on this pattern, most risk models would increase the weight of the trending asset and decrease the weight of the value asset, reinforcing the divergence. Many systematic strategies (such as CTAs, Risk Parity/Vol Target, Low-vol Risk factor portfolios) would do the same. The positive feedback between inflows and low volatility eventually increases the crash risk for trending assets.
We think S&P 500 momentum turning negative this year (after a 6-year rally) may be the first step of the mean reversion we expect to play out later this year. Mean reversion would lead to the outperformance of Emerging Market stocks, Commodities, Gold, and the Energy Sector, and relative underperformance of Momentum assets such as USD, S&P 500 Low Volatility and Momentum portfolios, and likely the S&P 500 itself.
Below we list and explain several structural factors that led to Macro-Momentum bubble:
Explicit Trend Following Strategies: Assets in strategies that explicitly follow price momentum experienced double digit growth over the past few years, and currently stand at over $350bn. This includes CTAs, but also in-house managed pension assets, dealers’ structured products, etc.
Implicit Trend Following Strategies: Many systematic strategies bias towards momentum assets. Historically, assets with strong trends exhibit lower volatility and lower correlation to other assets, and are over-weighted in risk budgeting frameworks such as Risk Parity and Volatility Control. In addition, Low Volatility/Smart Beta strategies often overlap with Momentum investing. Over the past year we saw a significant increase in these assets, with the asset base likely topping $1Tr.
Macro HF bets are aligned with Momentum bets: Over the past years, many popular macro trades (long USD, short Oil and Gold, long DM and short EM equities) are closely aligned with simple trend following signals. The more recent trades betting on HY defaults or breakdowns in EM currency pegs, also align with recent price momentum (USD up, Oil down, etc.)
Volatility based risk management: Many risk management tools refer to historical covariances to determine asset allocation. This approach prefers momentum assets (that have lower volatility and average correlation) over value assets.
Decrease of active assets and increase of passive assets: Active equity managers tend to have a value bias, while capitalization based passive indices tend to have a momentum bias (e.g., they increase the weight of stocks that outperform). The shift from active (e.g., seen from persistent mutual fund outflows) to passive assets (particularly ETFs) may have contributed to the underperformance of value and outperformance of momentum in equity long-short portfolios.
Higher cost of capital for Value assets: Value trades require more capital than Momentum. Given higher volatility, value assets tie up more risk capital for longer periods of time (momentum tends to work on shorter time horizons, and value/reversion on longer time horizons).
Lower liquidity of Value assets: Value assets, being more volatile than momentum assets are also less liquid. Since financial crisis, both investors and market makers are averse to hold and provide liquidity of less liquid assets.
So now we know that we have not one massive bubble, but a bubble of small asset-class divergences, all thanks to the Fed. What to do? As a reminder, here is how JPM’s will trade this: use transitory bounces to liquidate risk positions, and stay in either cash or gold until better buying opportunities present themselves.
Unless, of course, Yellen launches QE4, in which case all bets are off.
- "Dip Buying Is Officially Dead"
Back in November, JPM prophetically warned that “The long period of indiscriminately buying any dip might be coming to an end.” Today it’s official, and from the same JPM, in its closing day trading note we read that “dip buying is officially dead and stocks (esp. US ones) are no longer impressed by promises of central bank largess.”
From Adam Crisafulli’s LookBack at the Market
Market update – dip buying is officially dead and stocks (esp. US ones) are no longer impressed by promises of central bank largess. The reason the SPX has only witnessed insipid rally attempts during this weeks-long swoon is the absence of robust dip-buying.
In years past (when multiples were lower and Corporate America and the US economy were earlier in their recovery process) investors were confident in the SPX rebounding to fresh highs following any material dip and that helped keep sell-offs rare and brief. However, w/the economic and profit cycle advanced and multiples full that reservoir of dip buying doesn’t exist and rallies are now being looked at as opportunities to fade (and not something to be chased). This isn’t to mean the fundamental backdrop is nearly as bad as the YTD sell-off signals – economic data is holding up OK and (perhaps more importantly) the tone from CEOs (both on CQ4 earnings calls and during Davos interviews) is a lot better than both the present market and media narrative would suggest.
However, the current multiple/estimate framework is a formidable one and w/$120 and 16x considered “best case” scenarios its going to be hard for the SPX to lift much above the low/mid-1900 range (1950 is less than 5% from present levels, not compelling enough to fuel a wave of broad buying). As far as central banks are concerned it isn’t that they’ve “lost control” or are “powerless” – the world’s big CBs (FOMC, ECB, BOJ, BOE, and PBOC) remain extraordinarily accommodative and the fundamental landscape would be much worse w/o their actions. However, the relationship between accommodation and sentiment isn’t linear and the likely next CB steps are either too incremental to impress (mild adjustments from the ECB w/the Fed and BOE only staying on hold for longer) or structurally damaging as the limits of policy get hit (this is the case w/the BOJ and to a less extent the ECB as Eurozone bank investors grow nervous about deposit rates being brought deeper into negative territory).
The present debate is unnecessarily binary – just b/c the SPX isn’t about to sprint to fresh highs doesn’t mean a bear market, recession, or 2008-like environment is imminent. At the Wed lows (1812 on the SPX cash) conditions had become very oversold, sentiment was extremely bearish, and the unrelenting YTD selling was growing tired – all this, coupled w/a handful of OK earnings (XLNX, VZ, etc), a bounce in oil/energy equities (thanks to the inventory, some spurious OPEC emergency meeting noise, and KMI’s earnings), and the CB rhetoric (markets don’t respond to CB words like they did but that doesn’t mean a Draghi press conf. can’t help a deeply oversold market to bounce) helped engineer a (pretty tepid) rally. Flows didn’t spike Thurs and buying for the most part is hesitant (a mix of covering and faster-money “renting”) w/people keeping a close eye on the exit. It seems like this recent rebound should be able to persist for more than 24 hours (there isn’t as much urgent heavy selling left, as was evident mid-day Thurs when a sell-off attempt faltered) but the low/mid-1900s will remain a formidable ceiling (and the inability of banks to find any support, despite putting up solid numbers overall, is a negative omen).
So if BTFD is dead then… STFR?
- "What Planet Are We Living On?"
Submitted by Jeffrey Snider via Alhambra Investment Partners,
One follow up point to yesterday’s missive about why the economy seems to be converging in recession rather than full and blossoming recovery: There must be something said about the manner of redistribution in this “cycle” as different from all others. In other words, the Fed has been attempting greater and greater redistribution efforts via monetary interference ever since Solow and Samuelson predicted their disastrous “exploitable” Phillips Curve. At least in 1961 the Fed was as much a captured article of Treasury’s orbit, but after Greenspan (or Volcker, we don’t really know) moved to interest rate targeting (and eurodollar denial) the intent has been quite evident.
We can measure such things in raw, absolute terms, as the FOMC targeted a low of 3% for federal funds by September 1992. And while ostensibly in recovery, the economy experienced its first “jobless” version (just ask Bush Sr.) during the whole of the low-rate regime. The next cycle, after recognizing just the contours of a grand monetary shift, Greenspan by June 2003 had federal funds targeted at 1%; (not) coincidentally that was another and more prolonged “jobless recovery.” We have now not just ZIRP but much more than that the jobless nature of the economy this time is in a class by itself far removed even from those prior two.
The things that have happened over the past eight plus years (the first “emergency” rate cut was September 2007; since that initial moment of “stimulus” we have anyway received the worst recession and then the worst recovery of any cycle dating to the 1930’s and it isn’t even close) would have in 2006 seemed so far beyond radical as to have been plain absurd. Redistribution predicated upon the increasingly bizarre begins to describe our economic deficiency quite well, I think; including the growing unease about having another recession without ever finding recovery from the last great one.
To appreciate that point in all its “glory”, we need only look to Japan yet again where, if orthodox economists survive this one still with any influence at all, we find our future. Japan has pioneered the absurd, but we mustn’t think we are all that far away from this (thanks to L Bower for pointing it out):
The Bank of Japan’s purchase of corporate debt at negative yields for the first time adds to distortions in Japan’s bond markets and raises risks for investors and banks, according to Mana Nakazora, the chief credit analyst in Tokyo at BNP Paribas SA.
The central bank bought corporate bonds in market operations at minus 0.03 percent on Wednesday, according to data from the central bank. While the BOJ has purchased company notes at zero interest in the past, it’s the first time for it to buy the debt at negative levels, according to data compiled by Bloomberg.
What planet are we living on? It is, at least, truly the death of money both as an economic tool and even the living, historical concept. Again, if we think that only something for or from Japan, ask yourself what a Yellen might do if 2016 turns out the way it is shaping up. Our future is continuously bleak as central bankers cling with religious devotion to increasingly absurd redistribution schemes, or to fix the error – them.
- "China Is Not Contained" Credit Market Screams
We have seen this pattern before, and it did not end well. While the most mainstream indications of China's "stability" are droned on about as indicating some level of control (i.e. Yuan volatility suppression), the fact is that no matter how hard China tries to centrally plan the entire world, segments of the credit market are screaming "uncontained."
First, China was forced to inject the most liquidity in three years… and it's still not helping support risk…
The last time China supressed FX volatility, in the desperate hopes of holding the balloon underwater long enough for everything to be fine, China's sovereign CDS market was screaming that devaluation was coming… and it did – and large. Now, we see the same pressures building…
And finally, despite record amounts of liquidity being spewed into China's financial markets, China's largest bank – ICBC – is seeing its credit risk explode…
Do these pictures look like China is "contained" as Bernanke and Dalio believe?
- Someone Is Trying To Corner The Copper Market
It may not be as sexy as gold and silver, but sometimes even doctor copper needs a little squeeze and corner love as well, and according to Bloomberg, that is precisely what someone is trying to do.
One company whose identity is unknown, is “hoarding as much as half the copper available in warehouses tracked by the London Metal Exchange.”
However, unlike the famous cornering of silver by the Hunts in 1980 which sent the price soaring if only briefly, in this case the unknown manipulator is trying to push the price of the physical lower. By taking control of half the available copper, the trader can help drive up the fees associated with rolling forward a short position, making it tougher for speculators to keep their bearish, explains Bloomberg.
Indeed, as shown in the chart below, this week the borrowing cost jumped to the highest in three years, almost as if someone is desperately trying to punish the shorts in a strategy very comparable to what Shkreli did with KBIO, when he bought up 70% of the outstanding stock and then made removed his shares from the borrowable pool, forcing a massive short squeeze.
In its disclaimer warning, Bloomberg writes that the episode, which caught traders by surprise “is one example of the perils of trading on the London Metal Exchange, where contracts are physically settled and speculators can end up paying dearly if they leave their bets without an offsetting position. Money managers are holding a net-short position on the LME, with prices down 23 percent in the past year and no sign of a recovery in Chinese demand.”
Meanwhile, market participants are quietly moving to the sidelines ahead of what may be some serious copper price swings:
“A big trader is probably trying to squeeze the market,” said Gianclaudio Torlizzi, the managing director of T-Commodity srl, a Milan-based consultancy.“It’s an indication the supply side in copper is tightening.”
Bloomberg adds that yesterday was the third Wednesday of the month, when many traders settle their commitments. To renew a short position, traders have to buy back metal while selling it forward. The tom-next spread, a measure of how much the process costs over one day, jumped as high as $30 a metric ton on Tuesday, the highest since May 2012.
The declining amounts of physical copper mean that liquidity in the metal is evaporating, resulting in violent, sharp price swings. The amount of metal available in warehouses has dropped more than 40 percent since August, making it costly to roll shorts.
So who is trying to corner the plunging in price metal? According to Bloomberg, the suspect who controls a large portion of the copper is an unidentified company. “Two firms held 40 to 49 percent of copper inventories and short-dated positions, according to Jan. 19 exchange data that shows holdings as a proportion of available stockpiles. While the LME provides data on the approximate size of large positions, it doesn’t disclose who is behind them.”
One wonders if perhaps the question is not which company is behind the cornering, but rather which country.
Still, no matter who is behind this attempt to artificially push copper prices higher – which may explain the recent industrial metal strength – one can’t help but wonder how it plays out, because there is hardly a “cornering” episode in history that does not end in tears.
And certainly not in copper, where cornering attempts are nothing new, but perhaps few instances of manipulation are quite as infamous as that of “Mr. Copper” Yasuo Hamanaka. For those who are unfamiliar, here is a brief recap of what happened in the mid-1990’s.
The Copper King: An Empire Built On Manipulation
The commodities market has grown in importance since the 1990s, with more investors, traders and merchants buying futures, hedging positions, speculating and generally getting the most out of the complex financial instruments that make up the commodities market. With all the activity, people dependent on futures to remove risk have raised concerns over large speculators manipulating the markets. In this article we’ll look to the past for one of the biggest cases of market manipulation in commodities and what it meant to the future of futures.
The 5%
There is still a sense of mystery surrounding Yasuo Hamanaka, a.k.a. Mr. Copper, and the magnitude of his losses with the Japanese trading company Sumitomo. From his perch at the head of Sumitomo’s metal-trading division, Hamanaka controlled 5% of the world’s copper supply. This sounds like a small amount, since 95% was being held in other hands. Copper, however, is an illiquid commodity that cannot be easily transferred around the world to meet shortages. For example, a rise in copper prices due to a shortage in the U.S. will not be immediately canceled out by shipments from countries with an excess of copper. This is because moving copper from storage to delivery to storage costs money, and those costs can cancel out the price differences. The challenges in shuffling copper around the world and the fact that even the biggest players only hold a small percentage of the market made Hamanaka’s 5% very significant.
The Setup
Sumitomo owned large amounts of physical copper, copper sitting in warehouses and factories, as well as holding numerous futures contracts. Hamanaka used Sumitomo’s size and large cash reserves to both corner and squeeze the market via the London Metal Exchange (LME). As the world’s biggest metal exchange, the LME copper price essentially dictated the world copper price. Hamanaka kept this price artificially high for nearly a decade leading up to 1995, thus getting premium profits on the sale of Sumitomo’s physical assets.
Beyond the sale of its copper, Sumitomo benefited in the form of commission on other copper transactions it handled, because the commissions are calculated as a percentage of the value of the commodity being sold, delivered, etc. The artificially high price netted the company larger commissions on all of its copper transactions.
Smashing the Shorts
Hamanaka’s manipulation was common knowledge among many speculators and hedge funds, along with the fact that he was long in both physical holdings and futures in copper. Whenever someone tried to short Hamanaka, however, he kept pouring cash into his positions, outlasting the shorts simply by having deeper pockets. Hamanaka’s long cash positions forced anyone shorting copper to deliver the goods or close out their position at a premium.
He was helped greatly by the fact that, unlike the U.S., the LME had no mandatory position reporting and no statistics showing open interest. Basically, traders knew the price was too high, but they had no exact figures on how much Hamanaka controlled and how much money he had in reserve. In the end, most cut their losses and let Hamanaka have his way.
Mr. Copper’s Fall
Nothing lasts forever, and it was no different for Hamanaka’s corner on the copper market. The market conditions changed in 1995, in no small part thanks to the resurgence of mining in China. The price of copper was already significantly higher than it should have been, but an increase in the supply put more pressure on the market for a correction. Sumitomo had made good money on its manipulation, but the company was left in a bind because it still was long on copper when it was heading for a big drop.
Worse yet, shortening its position – that is, hedging with shorts – would simply make its significant long positions lose money faster, as it would be playing against itself. While Hamanaka was struggling over how to get out with most of the ill-gotten gains intact, the LME and Commodity Futures Trading Commission (CFTC) began looking into the worldwide copper-market manipulation.
Denial
Sumitomo responded to the probe by “transferring” Hamanaka out of his trading post. The removal of Mr. Copper was enough to bring the shorts on in earnest. Copper plunged, and Sumitomo announced that it had lost over $1.8 billion, and the losses could go as high as $5 billion, as the long positions were settled in a poor market. They also claimed Hamanaka was a rogue trader and his actions were completely unknown to management. Hamanaka was charged with forging his supervisor’s signatures on a form and was convicted.
Sumitomo’s reputation was tarnished, because many people believed that the company couldn’t have been ignorant of Hamanaka’s hold on the copper market, especially as it profited from it for years. Traders argued that Sumitomo must have known, as it funneled more money to Hamanaka every time speculators tried to shake his price.
Fallout
Sumitomo responded to the allegations by implicating JPMorgan Chase and Merrill Lynch. Sumitomo blamed the two banks for keeping the scheme going by granting loans to Hamanaka through structures like futures derivatives. All of the corporations entered litigation with one another, and all were found guilty to some extent. This fact hurt Morgan’s case on a similar charge related to the Enron scandal and the energy-trading business Mahonia Ltd. Hamanaka, for his part, served the sentence without comment.
- Guest Post: Sarah Palin Is Making Sense (Really!)
Authored by Jon Schwarz, originally posted at The Intercept,
While the New York Times ridiculed Sarah Palin’s speech endorsing Donald Trump yesterday as “mystifying,” a big portion of it was a non-mysterious, coherent attack on big money politics. It’s worth reading that whole portion:
[Trump] is beholden to no one but we the people. …
Trump, what he’s been able to do, which is really ticking people off, which I’m glad about, he’s going rogue left and right, man. That’s why he’s doing so well. …
The permanent political class has been doing the bidding of their campaign donor class and that’s why you see that the borders are kept open. For them, for their cheap labor that they want to come in. That’s why they’ve been bloating budgets. It’s for crony capitalists to be able to suck off of them. It’s why we see these lousy trade deals that gut our industry for special interests elsewhere.
We need someone new, who has the power, and is in the position to bust up that establishment. …
His candidacy, which is a movement. It’s a force. It’s a strategy. It proves, as long as the politicos, they get to keep their titles and their perks and their media ratings. They don’t really care who wins elections. …
And the proof of this? Look what’s happening today. Our own GOP machine, the establishment, they who would assemble the political landscape, they’re attacking their own frontrunner. …
We, you, a diverse dynamic, needed support base that they would attack. And now, some of them even whispering, they’re ready to throw in for Hillary over Trump because they can’t afford to see the status quo go. Otherwise, they won’t be able to be slurping off the gravy train that’s been feeding them all these years. They don’t want that to end.
Trump himself has repeatedly condemned politicians’ servitude toward their big donors.
During the first GOP debate last August in Cleveland, he declared, “I was a businessman. I give to everybody. When they call, I give. And do you know what? When I need something from them two years later, three years later, I call them, they are there for me. And that’s a broken system.”
Palin and Trump may or may not believe what they’re saying. As Laura Friedenbach, press secretary of the campaign finance reform organization Every Voice, points out, “Every single Republican presidential candidate, including Donald Trump, has so far failed to offer” any concrete plan to reduce the influence of money in politics.
However, they’re responding to a genuine passion among Republicans. A 2015 New York Times poll found that 80 percent of Republicans believe “money has too much influence” in political campaigns, and 81 percent feel the campaign finance system needs either “fundamental changes” or must be completely rebuilt. A recent survey by Democracy Corps found that 66 percent of likely Republican voters support a program of public matching funds for small donors. Among Republican candidates such a program would be an enormous boon to Ben Carson and Ted Cruz (and less so to Trump, since his campaign is almost completely self-financed).
Palin did, however, inaccurately differentiate the Democratic and Republican establishments, claiming that Democratic powerbrokers would never “come after their frontrunner and her supporters … because they don’t eat their own. They don’t self-destruct.” In fact, the Democratic party elite has previously attempted to destroy its own presidential candidate, most notoriously in 1972 when new primary rules allowed George McGovern to capture the nomination; as a Richard J. Daley ward heeler predicted that fall, McGovern was “gonna lose because we’re gonna make sure he’s gonna lose.” And if Bernie Sanders genuinely threatens Hillary Clinton, Democratic establishment attacks on him as a “socialist” with “wackadoodle” ideas will surely intensify, for exactly the reason Palin identified: “They can’t afford to see the status quo go.”
- "Most Of Us Ended Up At Office Depot": Thousands Of Angry Students "Flood" Government With Demands For Debt Relief
Last summer, Corinthian Colleges closed its doors amid government scrutiny of for-profit colleges.
The school – which had been the recipient of some $1.5 billion in annual federal aid funding – was variously accused of employing deceptive marketing practices, falsifying job placement records, and lying about graduation rates.
As we noted when the doors were shut, for-profit students won’t have a particularly easy time transferring their credits (meaning they would have to start over at another school if they wanted to complete their degrees). That means that when a government mandated closure leaves them out in the cold, they’ll likely seek to take advantage of their ‘right’ to have their debt discharged.
Sure enough, the government quickly found itself scrambling to respond after Secretary of Education Arne Duncan received a group request from 78,000 former Corinthian students requesting loan forgiveness in late May. Essentially, the law says students can have their debt expunged in the event they’ve been defrauded. In cases like Corinthian, where the government itself has effectively accused the school of fraud, it’s difficult to deny students’ claims.
We immediately suggested that in the wake of the Corinthian affair, many more of the nation’s heavily indebted students and former students would seek to have their loans forgiven as well. Here’s what we said in May:
The real question now is whether continued pressure on for-profit colleges will result in further closures and more petitions from hundreds of thousands of students with tens of billions of loans they now know can be legally discharged. Note that we have not used the term “canceled”, because as we like to remind readers, liabilities are never “canceled”, they are simply written off by the person for whom they are an asset.
Fast forward nine months and sure enough, “thousands” of students are “flooding the government” with appeals to have their student loans discharged on the grounds they were the victims of fraud.
“In the past six months, more than 7,500 borrowers owing $164 million have applied to have their student debt expunged under an obscure federal law that had been applied only in three instances before last year,” WSJ wrote on Wednesday. “The law forgives debt for borrowers who prove their schools used illegal tactics to recruit them, such as by lying about their graduates’ earnings.” Here’s more:
The U.S. Education Department has already agreed to cancel nearly $28 million of that debt for 1,300 former students of Corinthian Colleges—the for-profit chain that liquidated in bankruptcy last year. The department has indicated that many more will likely get forgiveness.
The sudden surge in claims has flummoxed the Education Department, which says the 1994 forgiveness program is overly vague. The law doesn’t specify, for example, what proof is needed to demonstrate a school committed fraud.
And that’s a problem. Because the law is short on specifics, US taxpayers are theoretically on the hook for every student who feels aggrieved at not being able to secure gainful employment in a field related to what they studied in college. “The program could prove to be one of the few lifelines for hundreds of thousands of Americans buried in student debt after attending disreputable schools that failed to land them a decent job,” WSJ continues.
Of course “disreputable schools” aren’t to blame for every jobless graduate.
As we’ve shown on countless occasions using countless metrics, the “robust” US labor market is anything but, and has been reduced to a kind bartender creation machine. That deplorable state of affairs is the result of America’s rapid transformation from a middle class utopia buoyed by breadwinner jobs in sectors like manufacturing to a kind of modern day fuedal system wherein the peasantry slaves away in the service sector so the robber barons can enjoy conveniences like $6 lattes. “Andrew Kelly of the American Enterprise Institute, a conservative think tank, said there is a danger that the program will become overly broad, encompassing not just instances of outright fraud, but also cases in which borrowers simply regret taking out the debt because they can’t find a job, through no fault of the colleges,” WSJ adds, underscoring our point.
Because the government didn’t take the time to spell out what counts as “fraud,” taxpayers may effectively end up subsidizing the “strong” US jobs market by bailing out every student who can’t find gainful employment in an economy which, if you believe the BLS, is adding nearly 300,000 positions a month.
Imagine the shock when the US public suddenly realizes that bailing out jobless students isn’t compatible with the “robust” labor market rhetoric. Here’s a bit more from The Journal:
The surge in applications reflects the growing savvy of student activists, who discovered the law last year after it had largely sat dormant for two decades. Education Department officials say the agency failed to draft rules after the law was passed in the early 1990s and lacked the urgency to do so because it had only received five applications—three of them granted—before last year.
The clamoring for forgiveness represents the fallout of a college-enrollment boom—driven by a surge in students attending for-profit colleges—that caused student debt to nearly triple in the past decade to $1.2 trillion, New York Federal Reserve figures show. Seven million Americans have defaulted, government data show.
So far, almost all of the borrowers applying for forgiveness under the 1994 program attended for-profit schools.
Three-quarters went to Corinthian-owned institutions, while hundreds of others attended the Art Institutes, owned by Education ManagementCorp.; and ITT Technical Institutes, owned by ITT Educational Services Inc. All three have been the subject of federal investigations into illegal recruiting tactics in recent years.
“I feel robbed of my life,” wrote one student who said she owes $114,000 in federal student debt—most of it in her mother’s name—for her time at a branch of the Art Institutes chain of for-profit schools. “Even after paying my student loans on time and in full every month for over seven years, I’ve barely made a dent.”
Syd Andrade’s story is emblematic. He said in an interview that during his high-school senior year, he received a call from an Art Institutes recruiter promising “great facilities, great teachers, use of industry-standard software” for a game-art design program.
Mr. Andrade, who graduated from the company’s Tampa, Fla., location, said the classes used outdated software and were taught by an instructor who knew less than the students. “Most of the time spent in her classes were us teaching her,” he said. “It was a group effort of everyone trying to learn together.”
So while the phenomenon is for now confined to the shady for-profit arena, don’t kid yourself into thinking that there aren’t student activist groups at large state schools pondering how they can take advantage of the law as well. In short, it’s just a matter of time before the “thousands” of appeals flooding the Department of Education turn into tens and hundreds of thousands as recent graduates suddenly discover the harsh realities of America’s waiter and bartender economy.
At the end of the day, there’s $1.2 trillion in student debt that needs paying down and students simply aren’t finding the type of jobs they need to service their liabilities. That means you, dear taxpayer, will shoulder the burden of wiping the slate clean for millions of disgruntled students who were literally sold a lie not only about the quality of the education they would receive, but about the well being of the American dream itself.
On that note, we close with a quote from the abovementioned Syd Andrade:
“They promised us to get jobs in the field, and most of us ended up at Office Depot,” he said.
- Recession Signs – 2008 & Now
Submitted by Lance Roberts via RealInvestmentAdvice.com,
Warning Signs Of A Recession
In late 2007, I was giving a presentation to a group of about 300 investors discussing the warning signs of an impending recessionary period in the economy. At that time, of course, it was near “blasphemy” to speak of such ills as there was “no recession in sight.”
Then, in December of that year, I penned that we were either in, or about to be in, the worst recession since the “Great Depression.” That warning too was ignored as then Fed Chairman Ben Bernanke stated that it was a “Goldilocks Economy.” The rest, as they say, is history.
I was reminded of this as I was reading an article by Myles Udland, via Business Insider, entitled “The US economy is nowhere near a recession.”
It is an interesting thought. However, the problem for most analysts/economists is that they tend to view economic data as a stagnant data point without respect for either the trend of the data or for the possibility of future negative revisions. As shown in the chart below, this is why it SEEMS the financial markets lead economic recessions.
However, in reality, they are more coincident in nature. It is just that it takes roughly 6-12 months before the economic data is negatively revised to show the start of the recession. For example, the recession that started in 2007 was not known until a year later when the data had been revised enough to allow the NBER to make its official call.
The market decline beginning this year is likely an early warning of further economic weakness ahead. I have warned for some time now that the economic cycle was exceedingly long given the underlying weakness of the growth and that eventually, without support from monetary policy, would likely give way. The following charts are the same ones I viewed in 2007, updated through the most recent data periods, which suggested the economy was approaching a recessionary state. While not all are in negative territory yet, they are all headed in that direction.
Is the economy “nowhere near recession?” Maybe. Maybe not. But the charts above look extremely similar to where we were at this point in late 2007 and early 2008.
Could this time be “different?” Sure. But historically speaking, it never has been.
The Topping Process Completes
For the last several months I have repeatedly discussed the topping process in the markets and warned against dismissing the current market action lightly. To wit:
“Typically bubbles have an asymmetric shape. The boom is long and slow to start. It accelerates gradually until it flattens out again during the twilight period. The bust is short and steep because it involves the forced liquidation of unsound positions.
The chart below is an example of asymmetric bubbles.
The pattern of bubbles is interesting because it changes the argument from a fundamental view to a technical view. Prices reflect the psychology of the market which can create a feedback loop between the markets and fundamentals.
This pattern of bubbles can be clearly seen at every bull market peak in history.”
Take a look at the graphic above, and the one below. See any similarities?
As you will notice, the previous two bull-market cycles ended when the topping process ended by breaking the rising support levels (red line). The confirmation of the onset of the “bear market” was marked by a failed rally back to the previous rising support level. Currently, that has not occurred as of yet.
The next chart is another variation of the above showing the break-down of the rising bullish trend in the market. In all cases, investors were given minor opportunities to reduce equity risk in portfolios well before the onset of the bear market decline.
I have been asked repeatedly as of late whether or not the markets will provide a similar “relief rally” to allow for escape. The answer is “yes.” However, as in the past, those relief rallies tend to be short-lived and don’t get investors “back to where they were previously.”
The risk to the downside has risen markedly in recent weeks as the technical, fundamental and economic deterioration escalates. This is not a time to be complacent with your investments.
“One & Done Yellen” And The Rise Of QE4.
Back in December, when Janet Yellen announced the first hike in the Fed Funds rate in eleven years from .25% to .50%, the general mainstream consensus was “not to worry.” It was believed that a rate hike by the Fed would have little impact on equities given the strong economic recovery at hand. Well, that was what was believed anyway as even Ms. Yellen herself suggested the “odds were good” the economy would have ended up overshooting the Fed’s employment, growth and inflation goals had rates remained at low levels.
The problem for Ms. Yellen appears to have a been a gross misreading of the economic “tea leaves.” With economic growth weak, the tightening of monetary policy had a more negative impact on the markets and economy than most expected. As I wrote previously:
“Looking back through history, the evidence is quite compelling that from the time the first rate hike is induced into the system, it has started the countdown to the next recession. However, the timing between the first rate hike and the next recession is dependent on the level of economic growth at that time.
When looking at historical time frames, one must not look at averages of all rate hikes but rather what happened when a rate hiking campaign began from similar economic growth levels. Looking back in history we can only identify TWO previous times when the Fed began tightening monetary policy when economic growth rates were at 2% or less.
(There is a vast difference in timing for the economy to slide into recession from 6%, 4%, and 2% annual growth rates.)”
“With economic growth currently running at THE LOWEST average growth rate in American history, the time frame between the first rate and next recession will not be long.”
Given the reality that increases in interest rates is a monetary policy action that by its nature slows economic growth and quells inflation by raising borrowing costs, the only real issue is the timing.
With the markets appearing to have entered into a more severe correction mode, there is little ability for Ms. Yellen to raise interest rates any further. In fact, I would venture to guess that the rate hike in December was likely the only one we will see this year. Secondly, we are likely closer to the Federal Reserve beginning to drop “hints” about further accommodative actions (QE) if conditions continue to deteriorate.
It is important to remember that in 2010, when Ben Bernanke launched the second round of QE, the Fed added a third mandate of boosting asset prices to their roster of full employment and price stability. The reasoning was simple – create an artificial wealth effect encouraging consumer confidence and boosting consumption. It worked to some degree by pulling forward future consumption but failed to spark self-sustaining organic economic growth.
With market pricing deteriorating sharply since the beginning of the year, it will not take long for consumer confidence to slip putting further downward pressure on already weak economic growth. With Ms. Yellen already well aware she is caught in a “liquidity trap,” there would be little surprise, just as we saw in 2010, 2011 and 2013, for the Fed to implement another QE program in hopes of keeping consumer confidence alive.
The issue is at some point, just as China is discovering now with failure of their monetary policy tools to stem the bursting of their financial bubble, the same will happen in the U.S. With the Fed unable to raise rates to reload that particular policy tool, a failure of QE to stabilize the markets could be deeply problematic.
Just some things to think about.
- Venezuela Hits "Point of No Return" – 2016 Bankruptcy Is "Difficult To Avoid" According To Barclays
In November 2014, just after OPEC officially died with the 2014 Thanksgiving massacre which was the first oil-crushing catalyst that has led to crude’s relentless decline since Saudi Arabia officially broke off with the rest of the cartel, sending the black gold to a price of around $28 per barrel, we revealed who the first oil-exporting casualty of the crude carnage would be: the Latin American socialist paradise that is Venezuela.
Back then we said that the best way to bet on the OPEC cartel collapse, and the inevitable death of said socialist paradise as we know it, was to buy Venezuela CDS. Sure enough, anyone who has done so has generated massive returns since then.
More importantly, the wait for the long-overdue credit event is coming to an end.
As Barclays’ Alejandro Arreaza notes, Venezuela has officially reached the “point of no return” and writes that “the economic emergency decree and any measures that the government could take at this point may be too late. After two years of inaction and the recent decline in oil prices, a credit event in 2016 is becoming increasingly difficult to avoid, in our view.”
Here is why Barclays thinks that the first OPEC default is now just a matter of time:
Point of No Return
- The economic emergency decree and any measures that the government could take at this point may be too late. After two years of inaction and the recent decline in oil prices, a credit event in 2016 is becoming increasingly difficult to avoid, in our view.
- The figures released by the BCV show that foreign currency assets had reached USD35.5bn by the end of Q3 2015; however, we believe that they could have dropped further in Q4, to USD27.6bn, which is lower than our previous estimate of USD33bn.
- Considering current oil prices, any reasonable additional import cuts may be insufficient to cover the financing gap, in our view. At the oil price that the futures curve is pricing in (USD/b32), the government would need to use more than 90% of oil exports to make debt payments if we include market, bilateral, commercial, and Chinese Fund obligations.
- The authorities keep reiterating their willingness to pay. However, their position seems to indicate a lack of appreciation of the magnitude and roots of the critical situation that the Venezuelan economy is facing, which may increase the risk of a disorderly credit event.
- The government could still make the February payment using its available assets; however, they are insufficient to finance the gap of nearly USD30bn that Venezuela could face in 2016, considering our commodities team’s estimate of Brent at USD/b37, which is above what the oil future curve is pricing in (USD/b 32).
- Inaction has been costly for Venezuela. Although GDP growth figures were better than expected, they confirm that the country is in a severe recession, with an accumulated contraction of approximately 16% in the past two years, and considering the contraction that we expect in 2016, the country could lose almost one quarter of its GDP.
- Inflation had reached 141.5% by the end of Q3 2015, but is likely to have continued to accelerate in Q4, possibly exceeding 200% as we expected, showing the effects of monetization of the fiscal deficit.
Some more details, first on the lack of disposable assets to face the oil price collapse
After more than a year without publishing official data for the main economic indicators, the Central Bank of Venezuela (BCV) finally released the figures. The results are mixed. While activity indicators suggest that the economy’s contraction could have been smaller than we and the consensus expected, the external sector posted worse-than-expected results. The combination of lower-than-expected exports and higher-than-expected imports led to a larger-than-expected current account deficit. To finance this deficit, the public sector has been forced to liquidate more assets, which, in our view, leaves it with less than it would need to finance the deficit that it faces for 2016.
There have been important methodological changes in the way the official data are presented. In the case of the balance of payments, there is a reclassification of transactions that had previously been reported as capital outflows and seem to have been moved to imports of either goods or services. As a result, previous years’ current account balances have changed significantly (as a reference, the 2012 current account declined from USD11bn to just USD2.6bn). We believe that was mainly due to public sector trade transactions such as the “services” provided by Cuba under the energy agreements or imports of military equipment and capital goods from Russia, which previously were not considered imports. In addition, the exports show a balance for 2014/15 that is lower than PDVSA oil export figures suggest (circa 6% lower). A possible explanation for this could be that BCV figures are showing net exports, discounting crude imports. In the prices figures, there are important changes in weights of the different CPI components, particularly those that have increased the most (food). On several occasions, we contrasted official Venezuelan figures with other sources of information, but we have not found large inconsistencies. The differences have been explained mainly by accounting methods – for example, in oil exports, the type of crudes and products that are considered. Nonetheless, in the past, the market has been skeptical about the credibility of the official information, and these changes without a clear explanation increase the concerns.
BCV figures suggest that the government’s FX allocations to the private sector through the different mechanism (CENCOEX, SICAD, SIMADI) covered around half of the total private sector imports of goods and services. This could be an important factor when oil prices recover because it could give the government additional room, cutting FX allocations with a less than proportional effect in terms of imports. However, considering current oil prices, any reasonable import cut seems likely to be insufficient to cover the financing gap. Public sector external assets would have to decline below what we consider minimum operational levels. At the oil price that the futures curve is pricing in (USD/b32), the government would need to use more than 90% of the oil exports to make debt payments if we include market, bilateral, commercial, and Chinese Fund obligations (Figure 3). After two years of inaction, with depleting external assets and the recent decline in oil prices, a credit event in 2016 may be becoming hard to avoid, in our view.
In other words, a default is coming in 2016, which may explain Maduro’s increasingly more panicked pleas to OPEC to cut production, pleas which fall on deaf ears.
Who is to blame for the country’s imminent bankruptcy? Well, the government of course, although in all honesty Maduro’s regime has not dony anything different from every other “developed” regime in the past 6 years, which instead of undertaking difficult fiscal reform and structural changes, merely kicked the can hoping things would get better.
They didn’t, and now Venezuela has to pay the piper.
Inaction has been costly
In addition to the weaker external position of the country, the rest of the economic indicators show a strong deterioration. The government has avoided an orthodox adjustment and has preferred to implement quantitative restrictions. The results indicate that the authorities’ inaction in tackling the large distortions in the economy has been costly for the country. Although GDP growth figures were better than expected, they confirmed that Venezuela is in a severe recession. GDP fell 4.5% in the first three-quarters of the year, but considering its trend and tightening of controls by the government, the whole-year contraction could have been 5.8%, with an accumulated contraction of approximately 16% in the past two years, and considering the contraction expected in 2016, it could lose almost one quarter of its GDP.
Inflation had reached 141.5% by the end of Q3 2015, but it is likely to have continued to accelerate in Q4, possibly exceeding 200% as we expect, showing the effects of monetization of the fiscal deficit.
Although these inflation figures are historical, we believe they underestimate real inflation. In fact, since June 2014, the central bank has modified the method used to calculate the inflation rate, changing the weights of different goods and services that make up the consumer price index. Curiously, the new weighting system reduced the effect on general inflation of some groups such as food, alcoholic beverages, restaurants, and hotels, characterized by a higher inflation rate than the average, and increased the weights of rents and telecommunications groups, characterized by lower inflation rates associated with strict price controls or a heavy market share by state companies.
As a consequence of these reforms, the official inflation rate was 68.5% in 2014, instead of 76% using the previous method. In 2015, the gap from using the different methods is even larger. Consider the inflation number on a year-on-year basis for all sectors, inflation would have been187.9% instead of 141.5%. For the first nine months of 2015, using the new weights, the BCV indicated that inflation reached 108.7%, but with the old weights, inflation would have been at 144.1%. Following this trend, we expect that the official inflation rate could close 2015 at 210.4%, more than double the highest rate in Venezuelan history, but using the previous weights, inflation could have been 290.7%. Such high inflation has a strong detrimental effect not only on real salaries, but also on income distribution, as the lowest income part of the population tends to have fewer alternatives to protect against inflation. This could increase social and political risks, making the current equilibrium increasingly unstable.
Translation: first default, then revolution.
Which is good news for those who buy CDS. Our only hope for those who have held so far is that the counterparty you will have to novate with will still be around once the sparks fly, because once this first OPEC member goes bankrupt, things will start moving very fast.
Finally, for all those who are praying for an oil bounce, your day may be near, because nothing will send the price of crude soaring quite as fast as one entire OPEC nation suddenly entering a death spiral of chaos.
- "Is That It?"- Global Jawbone & Crude Pump Fails To Ignite Equity Exuberance
BoJ Jawboning, ECB jawboning, PBOC rumors, and an artificial ETN-driven crude ramp… and we end up with this?
And despite the largest liquidty injection in 3 years, Chinese stcoks tumbled…
Seems like the central planners are losing their grip…
The Short Squeeze-driven rally is over – "Most Shorted" stocks extended their squeeze from yesterday thanks to Draghi into the European close and then everything started to fade…
Stocks managed to hold yesterday's bounce gains but traded in a very rangebound (admittdly wide) manner all day…
But were unable to hold green for the week…
As a reminder for 2016, things are still ugly…
Credit was not buying the bounce in the afternoon…
Much of today's strength was on the basis of crude's surge (despite surging inventories, rising production, and dropping demand), but Energy credit markets were not impressed…
And somethinmg is seriously broken in the oil ETF complex…
VIX futures (barely) broke its closing backwardation streak (Front month vs 2nd month)- which is what VIX ETPs are focused on…
Making it the 8th longest streak in history…
And the 3rd longest streak of spot-front-second month backwardation in history (h/t @RussellRhoads)
Lots of talk today that everything is awesome and the lows are in and that none of this is systemic… so why is bank counterparty risk soaring?
Treasury Yields continued their see-saw pattern ending the day steeper (30Y +5bps, 2Y unch) and 10Y pushed back above 2.00%
FX markets were volatile, as Draghi's jawboning spiked the USD (dumped EUR), but that was entirely unwound the close leaving USD Index just in the green for the week..Commodity currecies rallied notably…
Draghi impotence exposed…
Commodities were very mixed with PMs flat as crude and copper gained…
Crude was crazy today… but we suspect this was pure algos, runing stops to Iran…(and roll-related chaos on the ETN complex)
Charts: Bloomberg
- The Birth Of The PetroYuan (In 2 Pictures)
Give me that!!
It belongs to the Chinese now!
h/t @FedPorn
As we previously detailed, two topics we’ve deemed critically important to a thorough understanding of both global finance and the shifting geopolitical landscape are the death of the petrodollar and the idea of yuan hegemony.
In November 2014, in “How The Petrodollar Quietly Died And No One Noticed,” we said the following about the slow motion demise of the system that has served to perpetuate decades of dollar dominance:
Two years ago, in hushed tones at first, then ever louder, the financial world began discussing that which shall never be discussed in polite company – the end of the system that according to many has framed and facilitated the US Dollar's reserve currency status: the Petrodollar, or the world in which oil export countries would recycle the dollars they received in exchange for their oil exports, by purchasing more USD-denominated assets, boosting the financial strength of the reserve currency, leading to even higher asset prices and even more USD-denominated purchases, and so forth, in a virtuous (especially if one held US-denominated assets and printed US currency) loop.
The main thrust for this shift away from the USD, if primarily in the non-mainstream media, was that with Russia and China, as well as the rest of the BRIC nations, increasingly seeking to distance themselves from the US-led, "developed world" status quo spearheaded by the IMF, global trade would increasingly take place through bilateral arrangements which bypass the (Petro)dollar entirely. And sure enough, this has certainly been taking place, as first Russia and China, together with Iran, and ever more developing nations, have transacted among each other, bypassing the USD entirely, instead engaging in bilateral trade arrangements.
Falling crude prices served to accelerate the petrodollar’s demise and in 2014, OPEC nations drained liquidity from financial markets for the first time in nearly two decades:
By Goldman’s estimates, a new oil price “equilibrium” (i.e. a sustained downturn) could result in a net petrodollar drain of $24 billion per month on the way to nearly $900 billion in total by 2018. The implications, BofAML notes, are far reaching: "…the end of the Petrodollar recycling chain is said to impact everything from Russian geopolitics, to global capital market liquidity, to safe-haven demand for Treasurys, to social tensions in developing nations, to the Fed's exit strategy.”
Shifting to the idea of yuan hegemony, China is aggressively pushing its Silk Road Fund and Asian Infrastructure Investment Bank.
The $40 billion Silk Road Fund is backed by China’s FX reserves, the Export-Import Bank of China, and China Development Bank and seeks to increase ROIC for Chinese SOEs by investing in infrastructure projects across the developing world, while the $50 billion AIIB is funded by 57 founding member countries (the US and Japan have not joined) and will serve to upend traditionally dominant multilateral institutions which have failed to respond to the rising influence and economic clout of their EM membership. China will push for the yuan to play a prominent role in the settlement of AIIB transactions and may look to establish special reserves in both the AIIB and Silk Road fund to issue yuan-denominated loans.
Back in early November, SWIFT data showed that 15 new countries had joined a list of nations settling more than 10% of their trade deals with China in yuan. "This is a good sign for [yuan] adoption rates and internationalisation. In particular, Canada's [yuan] usage for payments, which has increased greatly over this period, is very interesting since we have not seen strong adoption of the [yuan] from North America to date,” Astrid Thorsen, Swift's head of business intelligence said.
Earlier that month, China and Russia indicated that going forward, more trade between the two countries would be settled in yuan. From Reuters, last November:
Russia and China intend to increase the amount of trade settled in the yuan, President Vladimir Putin said in remarks that would be welcomed by Chinese authorities who want the currency to be used more widely around the world.Spurred on by their often testy relations with the United States, Russia and China have long advocated reducing the role of the dollar in international trade.
Curtailing the dollar's influence fits well with China's ambitions to increase the influence of the yuan and eventually turn it into a global reserve currency. With 32 percent of its $4 trillion foreign exchange reserves invested in U.S. government debt, China wants to curb investment risks in dollar.
The quest to limit the dollar’s dominance became more urgent for Moscow this year when U.S. and European governments imposed sanctions on Russia over its support for separatist rebels in Ukraine.
"As part of our cooperation with this country (China), we intend to use national currencies in mutual transactions.The initial deals for rouble and yuan are taking place. I want to note that we are ready to expand these opportunities in (our) energy resources trade," Putin said at the time, suggesting that going forward, Russia may look to settle sales of oil in yuan.
Sure enough, Gazprom has confirmed that since the beginning of the year, all oil sales to China have been settled in renminbi. From FT:
Russia’s third-largest oil producer, is now settling all of its crude sales to China in renminbi, in the most clear sign yet that western sanctions have driven an increase in the use of the Chinese currency by Russian companies.
Russian executives have talked up the possibility of a shift from the US dollar to renminbi as the Kremlin launched a “pivot to Asia” foreign policy partly in response to the western sanctions against Moscow over its intervention in Ukraine, but until now there has been little clarity over how much trade is being settled in the Chinese currency.
Gazprom Neft, the oil arm of state gas giant Gazprom, said on Friday that since the start of 2015 it had been selling in renminbi all of its oil for export down the East Siberia Pacific Ocean pipeline to China.
Russian companies’ crude exports were largely settled in dollars until the summer of last year, when the US and Europe imposed sanctions on the Russian energy sector over the Ukraine crisis…
Gazprom Neft responded more rapidly than most, with Alexander Dyukov, chief executive, announcing in April last year that the company had secured agreement from 95 per cent of its customers to settle transactions in euros rather than dollars, should the need to do so arise.
Mr Dyukov later said the company had started selling oil for export in roubles and renminbi, but he did not specify whether the sales were significant in scale.
According to Gazprom Neft’s first-quarter results issued last month, the East Siberian Pacific Ocean pipeline accounted for 37.2 per cent of the company’s crude oil exports of 1.6m tonnes in the three months to March 31.
With that, the "PetroYuan" has officially been born and while FT notes that "other Russian energy groups have been more reluctant to drop the dollar for settlement of oil sales," the fact that Russian producers are now openly considering a shift at the same time that officials in the US and Europe are openly discussing stepped up economic sanctions suggests renminbi settlements may become more commonplace going forward.
To understand why and to what extent this is significant in the current environment, consider the following from WSJ:
Officials of the Organization of the Petroleum Exporting Countries, which declined to cut oil production last year, reasoned that maintaining high production levels would protect market share in crucial importing nations.;
But Chinese customs data released Friday show that China’s crude imports from some big OPEC nations have plummeted, while imports from Russia surged 36% in 2014. Meanwhile, imports from Saudi Arabia fell 8% and those from Venezuela dropped 11%.
To summarize: Western economic sanctions on Russia have pushed domestic oil producers to settle crude exports to China in yuan just as Russian oil is rising as a percentage of total Chinese crude imports. Meanwhile, the collapse in crude prices led to the first net outflow of petrodollars from financial markets in 18 years, and if Goldman's projections prove correct, the net supply of petrodollars could fall by nearly $900 billion over the next three years. All of this comes as China is making a concerted push to settle loans from its newly-created infrastructure funds in renminbi.
Putting it all together, the PetroYuan represents the intersection of a dying petrodollar and an ascendant renminbi.
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