- The Looming Financial Crisis Nobody Is Talking About, But Should Be
Submitted by Shaun Bradley via TheAntiMedia.org,
The world has been captivated by a continuous stream of disturbing and shocking headlines. Seemingly every other day, different terrorist attacks, police assassinations or political stunts ignite the public into an emotional frenzy. But as fear shuts down critical thinking, banks that control Europe’s financial system are entering a death spiral. Despite what establishment media narratives push, the most dangerous threat to our way of life isn’t a religious ideology or political divide.
The real risk is a contagion that is undermining the core of the financial system, and the interconnectedness of the globalized economy we live in makes containing the problem nearly impossible. Concerns that used to be isolated to the failing state of Greece have now engulfed the rest of the PIIGS nations. If these dominos continue to fall in Europe, the momentum could carry the destruction to every corner of the globe.
Italian banks are the latest on the chopping block in the wake of Brexit. For years, they have been acknowledged as a weak link in the economic chain, but they now face stress tests that could expose the scope of their internal problems. The oldest bank in the world, Monte Dei Paschi, is at the center of the controversy, with an expected shortfall of over 3 billion euros.
Other big names, like UniCredit, are in equally bad shape. Wells Fargo recently found that nearly 15% of all loans held by Italian banks could be at risk of default, a staggering figure to attempt to unwind. Further, England’s departure from the E.U. has sparked questions over the future of the euro — and Italy could be the catalyst for an all out breakdown of confidence. If panic begins to grip the Italian people, things could escalate quickly, potentially triggering bank runs.
Mihir Kapadia of Sun Global Investments explained the current situation in a recent article:
“A perfect storm of slow or zero Italian economic growth, low interest rates and politically connected, often corrupt, lending have combined to create a situation where the Italian financial system is in need of a large rescue.“
The head of the European Central Bank, Mario Draghi, wasted no time reassuring the markets and downplaying the significance of the hurdles ahead. Draghi is a former governor to the Bank of Italy, and he recently came out in full support of a ‘public backstop’ for the toxic loans. The public backstop suggested is the political term for shafting the taxpayer. Governments and banks alike have no problem shifting the responsibility of the debt onto the citizens, all while chastising them about how excessive their entitlement programs are and framing the greed of everyday people as the root of the issue. For the elites, it is much easier to use austerity measures, inflation, and shaming of the public to deflect blame from themselves than it is to take ownership for their own corrupt actions.
New regulations passed by the E.U. prevent bailout-style action similar to what the U.S. implemented during the 2008 crisis, meaning the only other option on the table is to use customer accounts to re-capitalize, otherwise known as a bail-ins. We saw a test run of this a few years ago in Cyprus, which led to the confiscation of all personal funds exceeding 100,000 euros. In this trial, the seizures only affected the very wealthy, so there was little major outrage; most accounts over the threshold were also held by foreigners, particularly from Russia.
But in such a future scenario, private savings accounts, retirement funds, and IRAs of average citizens could be stolen by the banks — without compensation — to cover their bad investments. Although it would be devastating for Italy to have to implement these tactics to save their failing institutions, the real fireworks would be the effects such a move could have on other key banks and foreign nations.
As time passes, red flags continue to emerge that point to a terminal diagnosis for the system as a whole. Deutsche bank is by far the most crucial in the E.U., as it supports the union’s powerhouse economy of Germany. In the last year alone, however, their stock price has plummeted more than 60%, bringing the total decline to 90% since its peak in 2007. The bank also just announced its plan to close over 188 branches and cut 3,000 jobs in the coming months. The rebound in the American financial sector over the last seven years never manifested in Europe; instead, the value of their banks continued to grind lower, perpetuated by political ineptitude and central bank manipulation. Germany is the last strong economy left to prop up the crumbling trade bloc in Europe, and without its stability, this grand experiment is doomed to fall apart at the seams.
If those signs aren’t bad enough, Deutsche has also become the poster child for the ominous derivatives bubble. It, alone, has amassed an exposure of over $75 trillion dollars in these risky devices, which is almost equal to theannual GDP of the world. This problem is by no means isolated to the European markets; the U.S. banks also drank the kool-aid, and believe it or not, helped create a quadrillion dollar mess.
The empty promises made by financial managers are only as good as the public’s confidence in them. Before the subprime mortgage crisis, it seemed like there wasn’t a care in the world — until everyone got spooked and headed for the exits at once. If a similar stampede occurred today, the implications would be far worse. The amount of money needed to pay out on the outstanding derivative contracts doesn’t even exist, and the CIA’s factbook states that broad money, including all paper currency, coins, checking, savings, and money market accounts, equals just over 80 trillion dollars — a mere fraction of the what it would take to cover the exposure of the banks.
Warren Buffet famously referred to these instruments as “financial weapons of mass destruction.” He reiterated his perspective in a more recent interview:
“I regard very large derivative positions as dangerous. We inherited a modest sized position at [Berkshire’s reinsurance vehicle] Gen Re in a benign market and we lost about $400m just trying to unwind it with no pressure on us whatsoever. So I think it does continue to be a danger to the system.”
The derivative market is one of the most obscure in all of finance. Instead of buying a share of a company, or a commodity like oil or corn at a future price, a derivative has no value on its own. Its entire worth is derived from the performance of other parts of the market. It is essentially a side bet on the price movements of real assets. If the major banks, like Deutsche, were to go under, all of those derivatives would be wiped out and could light the fuse on this economic time bomb.
Even George Soros has commented on the ongoing crisis in the E.U., saying:
“Europe’s leaders must recognize that the EU is on the verge of collapse. Instead of blaming one another, they should pull together and adopt exceptional measures.”
The Italian banking crisis and the ballooning derivative market may seem like a trivial issue that is out of sight and out of mind, but the black hole it could open up would destroy our way of life. Thinking about these possibilities can be terrifying, but there are steps that can be taken to ensure individuals at least have an insurance plan in place. Becoming educated on the financial system we’re living in is paramount to having the foresight needed to take action.
Developing technologies like Bitcoin and other cryptocurrencies have created an entirely new monetary system that isn’t subject to the corruption of the broken centralized model. These peer-to-peer networks can secure wealth while allowing unprecedented mobility and anonymity. Other forms of stable money, like gold or silver, also play a key role in financial independence. There are few assets with zero counter-party risks, and precious metals allow each individual to become their own central bank.
Being self-reliant is also a powerful tool; not being dependent on someone else in a worst-case scenario is crucial to thinking clearly when financial panic breaks out. There is no antidote for the potential chaos bearing down on us, but building strong relationships, obtaining basic skills, and stockpiling the necessities of daily lifecan provide peace of mind and preparedness.
A chain of events has been set in motion that will expose the massive fraud world banks and governments have perpetuated on their citizens. When fear porn is being promoted on the major networks, keep in mind the real threats to freedom and security will not be openly announced. The focus on the lone nutjob that kills 20 or the spread of deadly pandemics, for example, is nothing but propaganda aimed at shifting attention to things that are uncontrollable. Ensuring the masses feel helpless and in need of the government’s protection is priority number one for the ruling class. Talking heads and hedge fund managers will be eternally optimistic on the outlook for the future, even as the collapse becomes undeniably obvious. Problems for the European Union will continue to build, and the risk of the disease spreading to other economies increases by the day. Unfortunately, this Ponzi scheme system we built our societies on has left us vulnerable to any well-timed black swan event.
- Japanese Government Bonds Are Crashing
Ahead of tonight’s 10Y JGB auction and reportedly the unleashing of Abe’s fiscal stimulus, it appears the world’s investors are losing faith in the Bank of Japan’s buying power and the MoF’s credibility as Japanese government bonds are collapsing for the 3rd day in a row. With the biggest crash in prices (JGB Futures) since May 2013 (back to 5 month lows), yield across the entire JGB curve are exploding higher since Kuroda punted last week and questioned monetary policy effectiveness.
As the world awaits Japan’s over-promise and under-deliver fiscal stimulus…
- *SAKAKIBARA SAYS HE DOESN’T THINK ABENOMICS HAS FAILED
- *JAPAN FISCAL STIMULUS PLAN ALREADY PRICED IN, SAKAKIBARA SAYS
- *ABE STIMULUS PLAN WON’T HAVE A MAJOR IMPACT, SAKAKIBARA SAYS
“The fiscal spending will probably include public works spending, so we can expect something of an economic boost,” said Masaki Kuwahara, an economist at Nomura Securities Co. in Tokyo. But such growth may not be sustainable. “What Japan needs to do is to spur more demand and increase productivity by pushing through deregulation, increasing the nation’s potential growth rate.”
It appears demand for direct monetization of the debt and questioning BoJ capabilities (and therefore independence)…
- *JAPANESE GOVT GROWS SKEPTICAL OF BOJ’S INFLATION TARGET: NIKKEI
- *DLR/YEN WILL SLOWLY APPRECIATE TO 100 YEN: SAKAKIBARA
- *HAMADA REITERATES OPPOSITION TO HELICOPTER MONEY
- *HAMADA FAVORS RECOGNIZING DE-FACTO DEBT MONETIZATION
- *HAMADA FAVORS JAPAN PROCLAIMING A DEBT-MONETIZING POLICY
One of Prime Minister Shinzo Abe’s top advisers says he favors a declaration by Japan’s policy makers that their current measures are monetizing the nation’s debt.
Some people say that Japan has “already adopted ad hoc monetization of debt, and that to improve public confidence the government and the BOJ should recognize that they are doing already a combination of fiscal stimulus and de facto monetization,” Koichi Hamada, a former Yale University professor, said in an e-mailed response to questions.
“Given this long deflation and liquidity-trap type of behavior of Japanese banks and firms, I am now inclined to join the ranks” of those commentators, Hamada said. That view says “piecemeal and de facto monetization should be rather highlighted to change investors’ psychology,” he said.
Hamada declined to comment specifically on the Bank of Japan’s July 29 decision to conduct a “comprehensive” assessment of its measures at its next meeting, or whether it’s likely to expand stimulus further at that gathering, which is scheduled for Sept. 20-21.
The adviser also reiterated his opposition to “helicopter money.” “If one institutionalizes helicopter money or monetization of the new debt, the economy loses the safeguard against inflation.”
Through its easing to date, the BOJ has gobbled up more than one third of outstanding Japanese government bonds, and some observers don’t anticipate that debt will ever return into the hands of private investors. BOJ officials in the past debated a strategy of maintaining a large balance sheet — at least back in 2014, according to people familiar with the talks at the time. The context then was to avoid any spike in bond yields when the central bank reached its inflation target.
JGB yields are rising on concerns that BOJ’s planned comprehensive assessment of its policy, announced by Kuroda last week, will set back its monetary-easing stance…
Sending bond prices reeling…
This is the biggest 3-day drop since May 2013.
Is this the market pushing back demanding BoJ action… or the rebirth of the widowmaker trade?
- If Voting Made Any Difference, They Wouldn't Let Us Do It
Submitted by John Whitehead via The Rutherford Institute,
“The people who cast the votes decide nothing. The people who count the votes decide everything.”—Joseph Stalin, dictator of the Soviet Union
No, America, you don’t have to vote.
In fact, vote or don’t vote, the police state will continue to trample us underfoot.
Devil or deliverer, the candidate who wins the White House has already made a Faustian bargain to keep the police state in power. It’s no longer a question of which party will usher in totalitarianism but when the final hammer will fall.
Sure we’re being given choices, but the differences between the candidates are purely cosmetic ones, lacking any real nutritional value for the nation. We’re being served a poisoned feast whose aftereffects will leave us in turmoil for years to come.
We’ve been here before.
Remember Barack Obama, the young candidate who campaigned on a message of hope, change and transparency, and promised an end to war and surveillance?
Look how well that turned out.
Under Obama, government whistleblowers are routinely prosecuted, U.S. arms sales have skyrocketed, police militarization has accelerated, and surveillance has become widespread. The U.S. government is literally arming the world, while bombing the heck out of the planet. And while they’re at it, the government is bringing the wars abroad home, transforming American communities into shell-shocked battlefields where the Constitution provides little in the way of protection.
Yes, we’re worse off now than we were eight years ago.
We’re being subjected to more government surveillance, more police abuse, more SWAT team raids, more roadside strip searches, more censorship, more prison time, more egregious laws, more endless wars, more invasive technology, more militarization, more injustice, more corruption, more cronyism, more graft, more lies, and more of everything that has turned the American dream into the American nightmare.
What we’re not getting more of: elected officials who actually represent us.
The American people are being guilted, bullied, pressured, cajoled, intimidated, terrorized and browbeaten into voting. We’re constantly told to vote because it’s your so-called civic duty, because you have no right to complain about the government unless you vote, because every vote counts, because we must present a unified front, because the future of the nation depends on it, because God compels us to do so, because by not voting you are in fact voting, because the “other” candidate must be defeated at all costs, or because the future of the Supreme Court rests in the balance.
Nothing in the Constitution requires that you vote.
You are under no moral obligation to vote for the lesser of two evils. Indeed, voting for a lesser evil is still voting for evil.
Whether or not you cast your vote in this year’s presidential election, you have every right to kvetch, complain and criticize the government when it falls short of your expectations. After all, you are overtaxed so the government can continue to operate corruptly.
If you want to boo, boycott, picket, protest and altogether reject a corrupt political system that has failed you abysmally, more power to you. I’ll take an irate, engaged, informed, outraged American any day over an apathetic, constitutionally illiterate citizenry that is content to be diverted, distracted and directed.
Whether you vote or don’t vote doesn’t really matter.
What matters is what else you’re doing to push back against government incompetence, abuse, corruption, graft, fraud and cronyism.
Don’t be fooled into thinking that the only road to reform is through the ballot box.
After all, there is more to citizenship than the act of casting a ballot for someone who, once elected, will march in lockstep with the dictates of the powers-that-be. Yet as long as Americans are content to let politicians, war hawks and Corporate America run the country, the police state will prevail, no matter which candidate wins on Election Day.
In other words, it doesn’t matter who sits in the White House, who controls the two houses of Congress, or who gets appointed to the Supreme Court: only those who are prepared to cozy up to the powers-that-be will have any real impact.
As Pulitzer Prize-winning journalist Chris Hedges points out:
The predatory financial institutions on Wall Street will trash the economy and loot the U.S. Treasury on the way to another economic collapse whether Donald Trump or Hillary Clinton is president. Poor, unarmed people of color will be gunned down in the streets of our cities whether Donald Trump or Hillary Clinton is president. The system of neoslavery in our prisons, where we keep poor men and poor women of color in cages because we have taken from them the possibility of employment, education and dignity, will be maintained whether Donald Trump or Hillary Clinton is president. Millions of undocumented people will be deported whether Donald Trump or Hillary Clinton is president. Austerity programs will cut or abolish public services, further decay the infrastructure and curtail social programs whether Donald Trump or Hillary Clinton is president. Money will replace the vote whether Donald Trump or Hillary Clinton is president. And half the country, which now lives in poverty, will remain in misery whether Donald Trump or Hillary Clinton becomes president. This is not speculation. We know this because there has been total continuity on every issue, from trade agreements to war to mass deportations, between the Bush administration and the administration of Barack Obama.
In other words, voting is not the answer.
As I document in my book Battlefield America: The War on the American People, the nation is firmly under the control of a monied oligarchy guarded by a standing army (a.k.a., militarized police. It is an invisible dictatorship, of sorts, one that is unaffected by the vagaries of party politics and which cannot be overthrown by way of the ballot box.
“Total continuity” is how Hedges refers to the manner in which the government’s agenda remains unchanged no matter who occupies the Executive Branch. “Continuity of government” (COG) is the phrase policy wonks use to refer to the unelected individuals who have been appointed to run the government in the event of a “catastrophe.” You can also refer to it as a shadow government, or the Deep State, which is comprised of unelected government bureaucrats, corporations, contractors, paper-pushers, and button-pushers who actually call the shots behind the scenes.
Whatever term you use, the upshot remains the same: on the national level, we’re up against an immoveable, intractable, entrenched force that is greater than any one politician or party, whose tentacles reach deep into every sector imaginable, from Wall Street, the military and the courts to the technology giants, entertainment, healthcare and the media.
This is no Goliath to be felled by a simple stone.
This is a Leviathan disguised as a political savior.
So how do we prevail against the tyrant who says all the right things and does none of them? How do we overcome the despot whose promises fade with the spotlights? How do we conquer the dictator whose benevolence is all for show?
We get organized. We get educated. We get active.
If you feel led to vote, fine, but if all you do is vote, “we the people” are going to lose.
If you abstain from voting and still do nothing, “we the people” are going to lose.
If you give your proxy to some third-party individual or group to fix what’s wrong with the country and that’s all you do, then “we the people” are going to lose.
If, however, you’re prepared to shake off the doldrums, wipe the sleep out of your eyes, turn off the television, tune out the talking heads, untether yourself from whatever piece of technology you’re affixed to, wean yourself off the teat of the nanny state, and start flexing those unused civic muscles, then there might be hope for us all.
For starters, get back to basics. Get to know your neighbors, your community, and your local officials. This is the first line of defense when it comes to securing your base: fortifying your immediate lines.
Second, understand your rights. Know how your local government is structured. Who serves on your city council and school boards? Who runs your local jail: has it been coopted by private contractors? What recourse does the community have to voice concerns about local problems or disagree with decisions by government officials?
Third, know the people you’re entrusting with your local government. Are your police chiefs being promoted from within your community? Are your locally elected officials accessible and, equally important, are they open to what you have to say? Who runs your local media? Does your newspaper report on local events? Who are your judges? Are their judgments fair and impartial? How are prisoners being treated in your local jails?
Finally, don’t get so trusting and comfortable that you stop doing the hard work of holding your government accountable. We’ve drifted a long way from the local government structures that provided the basis for freedom described by Alexis de Tocqueville in Democracy in America, but we are not so far gone that we can’t reclaim some of its vital components.
As an article in The Federalist points out:
Local government is fundamental not so much because it’s a “laboratory” of democracy but because it’s a school of democracy. Through such accountable and democratic government, Americans learn to be democratic citizens. They learn to be involved in the common good. They learn to take charge of their own affairs, as a community. Tocqueville writes that it’s because of local democracy that Americans can make state and Federal democracy work—by learning, in their bones, to expect and demand accountability from public officials and to be involved in public issues.
To put it another way, think nationally but act locally.
There is still a lot Americans can do to topple the police state tyrants, but any revolution that has any hope of succeeding needs to be prepared to reform the system from the bottom up. And that will mean re-learning step by painful step what it actually means to be a government of the people, by the people and for the people.
- Will The Reserve Bank Of Australia Cut By 25bps: What Wall Street Thinks And How To Trade It
The ECB, Fed and mostly the BOJ, all did nothing during the recent round of central bank announcements, but hopes are high that the RBA will not disappoint tonight. The Australian central bank is expected by both the market and economists to cut the Daily Cash Rate by 25bps from 1.75% to 1.50% when it announces its decision at 2.30pm AEST.
The OIS market assigns 66.7% probability for a 25bp rate cut to 1.5% by RBA tonight; up from 62.5% last week, and up from 16.8% at the beginning of July. Meanwhile economists see 25 bp cut tonight (20 of 25 forecasts), five see no change.
“Monetary policy is really the only swing instrument – the only game in town,” said Andrew Ticehurst, an interest-rate strategist at Nomura Holdings Inc. in Sydney. “If we are in a world where fiscal policy is constrained because the government is a bit nervous about getting downgraded; if we are in a world where the Australian dollar is going to continue to trade north of fair value because of very low cash rates elsewhere and capital inflows; and if we are getting no policy assistance from those two levers, then monetary policy is all that’s left.”
A good summary of what will be announced tonight comes from Bloomberg’s Daniel Kruger who writes that the “RBA will cut, it has no better choice.” As he puts it, the economic problems Australia’s facing are familiar across the developed world: falling bond yields, unwanted currency strength, low inflation and the political reality of fiscal restraint.
The recent erratic nature of the global economy suggests Australia needs to seize control of what it can.
The benchmark rate is at 1.75%, so the central bank has some ammunition. Inflation has run below forecasts for the past two quarters, falling to 1% for the April-June period. And with Treasurer Scott Morrison focusing on reducing the budget deficit to help preserve the country’s AAA bond rating, the central bank has little choice but to act.
This meeting will also be the next to last with Glenn Stevens at the helm. With Philip Lowe set to replace him next month, Stevens may want to leave his deputy in the best shape possible.
If the RBA hopes the rate cut alone will weaken its currency, it may be disappointed as the move is mostly priced in. Forecasters surveyed by Bloomberg predict it falls to 71 U.S. cents by year-end.
Some observers point to the country’s 3.1% growth in the first quarter and the frothy housing market and argue that waiting is the smarter course.
However, an overheated home market is now important to the economy. It’s a key buffer as Australia looks to develop alternatives to its reliance on mining exports. The need for this shift is enhanced by China’s efforts to align its growth more with consumer activity and less with exports.
Other views:
According to RBC strategists led by George Davis, expect the RBA to cut rates 25bps after 2Q CPI confirmed inflation is undershooting target.
- Leading indicators suggest an inflation undershoot will persist for several quarters.
- RBA’s reluctant nature provides some uncertainty; don’t expect an overtly downbeat assessment to be provided in its communication.
- Growth ests, if anything, are likely to be revised higher
Alternatively, analysts at Commerzbank expect the RBA to hold
- Given recently mixed data, supporting commodity prices and the fact that the RBA has a rate meeting every 4 weeks, it can wait a little longer until a clear picture emerges
- As the RBA is likely to underline that a further rate cut remains probable, AUD gains are likely to be limited
- Pricing leaves open risk-reward trade for an RBA hold
- Further out, cut never fully priced by OIS; although market continues to price moderate chance of easing, it also begins pricing slight chance of hike, 0.6%, by July 2017
- Economists’ median calls for 25bp cut in 4Q with chance of another 25bp cut in 2017
How to trade it:
- The risk-reward favors AUD upside if the RBA holds vs potential downside if RBA cuts; AUD/USD range today 0.7562/0.7615, according to Bloomberg analysts
- No cut could see AUD rise within upward-sloping channel to test 2nd standard deviation resistance at 0.7710; it would also lead to a selloff in stocks and rates, sending yields higher and unwinding what moments ago was the tightest spread between Aussie and US 10Y, at just 32 bps, since 2001.
- Widely expected rate cut may see AUD retreat slightly toward 0.7503 1st standard deviation support; additional support at 0.7489 100-DMA may also limit AUD losses
* * *
The RBA is scheduled to release its decision at 2.30pm AEST.
- China Moves Forward With SDR Issuance In August
Submitted by Valentin Schmidt of The Epoch TImes
IMF Managing Director Christine Lagarde speaks at the 40th anniversary
of the IMFC meeting at the IMF Headquarters in Washington, April 20, 2013.When Bloomberg reported late last year that China founded a working group to explore the use of the supranational Special Drawing Rights (SDR) currency, nobody took heed.
Now in August of 2016, we are very close to the first SDR issuance of the private sector since the 1980s.
Opinion pieces in the media and speculation by informed sources prepared us for the launch of an instrument most people don’t know about earlier in 2016. Then the International Monetary Fund (IMF) itself published a paper discussing the use of private sector SDRs in July and a Chinese central bank official confirmed an international development organization would soon issue SDR bonds in China, according to Chinese media Caixin.
Caixin now confirmed which organization exactly will issue the bonds and when: The World Bank and the China Development Bank will issue private sector or “M” SDR in August.
The so-called SDR are an IMF construct of actual currencies, right now the euro, yen, dollar, and pound. It made news last year when the Chinese renminbi was also admitted, although it won’t formally be part of the basket until October 1st of this year.
How much? Nikkei Asian Review reports the volume will be between $300 and $800 million and some Japanese banks are interested in taking up a stake. According to Nikkei some other Chinese banks are also planning to issue SDR bonds. One of them could be the Industrial and Commercial Bank of China (ICBC) according to Chinese website Yicai.com.
The IMF experimented with these M-SDRs in the 1970s and 1980s when banks had SDR 5-7 billion in deposits and companies had issued SDR 563 million in bonds. A paltry amount, but the concept worked in practice.
The G20 finance ministers confirmed they will push this issue, despite private sector reluctance to use these instruments. In their communiqué released after their meeting in China on July 24:
“We support examination of the broader use of the SDR, such as broader publication of accounts and statistics in the SDR and the potential issuance of SDR-denominated bonds, as a way to enhance resilience [of the financial system].”
They are following the advice of governor of the People’s Bank of China (PBOC), Zhou Xiaochuan, although a bit late. Already in 2009 he called for nothing less than a new world reserve currency.
“Special consideration should be given to giving the SDR a greater role. The SDR has the features and potential to act as a super-sovereign reserve currency,” wrote Zhou.
Seven years later, it looks like he wasn’t joking.
- A Trader's Angry Rant "Economic Numbers Don’t Mean Anything Anymore"
By Bloomberg’s Richard Breslow
Economic Numbers Don’t Mean Anything Anymore
It may be August and the dog days of summer for trading interest, but the economic numbers this week are important. At least for now. They’ll determine how we spend the balance of the month characterizing the economy. Whether September has any relevance for Fed fund futures traders. And if the mindless buying of equities and risk continues apace.
Weak numbers follow strong ones, ad seriatum, and no one seems to have any credible idea why. The economic surprise index is knocking the cover off the ball, while mixed in we get the odd and horrific non-farm payroll report or GDP print.
Confidence in economic projections is low. That makes data dependence a dangerous conceit. Signal quality is bad, unreliable and with no shelf life.
Given the season, it’s hard not to worry whether the economy has caught the equivalent of the “sweating sickness.” Merry at breakfast, dead by dinner. And nary a soul could name a cause nor a cure. And that remains true 500 years later. Of course in matters economic we’ll get explanations by lunch time and everyone will have seen it coming, if only they’d been listened to.
Last week’s 2Q GDP guess came in at less than half the expert forecast. The market sliced a quick 10% off pricing for a rate-hike at the next meeting and left December at a paltry 35%.
Cue the Fed speakers. Williams, Kaplan and Dudley said what’s one number, don’t rule out a hike. That’s a real problem. No one understands the numbers so numbers don’t mean anything. But that’s how we’re meant to measure the economy and make investment decisions They need to spend more time trying to understand why no one “gets” the economy than where they hope its going. Finger-crossing shouldn’t be an input to an econometric model.
The ISM surveys and Friday’s payroll report will do a lot to script how Fed Chair Janet Yellen writes her Jackson Hole presentation and tell us how to trade the next few weeks. At least until the next set of data.
- In US Elections, Money Matters!
Simply put, in 40 years of US national elections – money talks, and bullshit (along with hope, change, trust, policy, and every other potential differentiator) walks…
As Statista details, so far, Hillary Clinton's campaign has raised substantially more money than Donald Trump's. But has cash ever really made a difference to U.S. election results down through the years? According to figures in Germany's Handelsblatt newspaper (which have since been converted from euro to dollars), all of the election winners in recent years were also budget winners.
Obama raised more money than Romney and McCain in 2012 and 2008, going on to win on both occasions. George W. Bush also took the White House in 2004 and 2000, having raised more money than his competitors on both occasions. The pattern repeated itself with Bill Clinton outmuscling his opponents financially in 1996 and 1992 before winning both elections.
You will find more statistics at Statista* * *
Based on that evidence, is Trump going to buck the trend and become the first “budget loser” to reach the White House since Jimmy Carter in 1976?
- Hillary’s Latest Headache: Skolkovo
The subject of Russia’s influence in American politics has been a hot topic of late, particularly as the MSM continues to link Donald Trump to Vladimir Putin and the DNC hack. However, a report published by the Government Accountability Institute presents a new twist in the Kremlin-US political ties. It all started with the 2009 “Russian reset” touted by then-Secretary of State Hillary Clinton.
As detailed in a WSJ op-ed by Peter Schweizer (author of the GAI report), after President Obama visited Russia in 2009, both nations agreed to “identifying areas of cooperation and pursuing joint projects and actions that strengthen strategic stability, international security, economic well-being, and the development of ties between the Russian and American people.”
One such project was Skolkovo, an “innovation city” of 30,000 people on the outskirts of Moscow, billed as Russia’s version of Silicon Valley. As chief diplomat, Hillary was in charge of courting US companies to invest in this new Russian city. Russia, on the other hand, had committed to spend $5 billion over the next three years (2009-12).
Hillary Clinton and Russian Foreign Minister Sergei LavrovAs Schweizer continues, “soon, dozens of U.S. tech firms, including top Clinton Foundation donors like Google, Intel and Cisco, made major financial contributions to Skolkovo, with Cisco committing a cool $1 billion. In May 2010, the State Department facilitated a Moscow visit by 22 of the biggest names in U.S. venture capital—and weeks later the first memorandums of understanding were signed by Skolkovo and American companies.
By 2012 the vice president of the Skolkovo Foundation, Conor Lenihan—who had previously partnered with the Clinton Foundation—recorded that Skolkovo had assembled 28 Russian, American and European “Key Partners.”
Of the 28 “partners,” 17, or 60%, have made financial commitments to the Clinton Foundation, totaling tens of millions of dollars, or sponsored speeches by Bill Clinton…
Russians tied to Skolkovo also flowed funds to the Clinton Foundation. Andrey Vavilov, the chairman of SuperOx, which is part of Skolkovo’s nuclear-research cluster, donated between $10,000 and $25,000 (donations are reported in ranges, not exact amounts) to the Clinton’s family charity”
Thus far, this should not be surprising. It is yet another instance of crony capitalism that has so well characterized the Clintons over the years. However, as US intelligence agencies including the FBI were soon to find out, the Russian Silicon Valley served other purposes as well.
More from the WSJ op-ed: “The state-of-the-art technological research coming out of Skolkovo raised alarms among U.S. military experts and federal law-enforcement officials. Research conducted in 2012 on Skolkovo by the U.S. Army Foreign Military Studies Program at Fort Leavenworth declared that the purpose of Skolkovo was to serve as a “vehicle for world-wide technology transfer to Russia in the areas of information technology, biomedicine, energy, satellite and space technology, and nuclear technology.”Moreover, the report said: “the Skolkovo Foundation has, in fact, been involved in defense-related activities since December 2011, when it approved the first weapons-related project—the development of a hypersonic cruise missile engine. . . . Not all of the center’s efforts are civilian in nature…”
“The FBI believes the true motives of the Russian partners, who are often funded by their government, is to gain access to classified, sensitive, and emerging technology from the companies. The [Skolkovo] foundation may be a means for the Russian government to access our nation’s sensitive or classified research development facilities and dual-use technologies with military and commercial application.”
As Schweizer concludes:
Even if it could be proven that these tens of millions of dollars in Clinton Foundation donations by Skolkovo’s key partners played no role in the Clinton State Department’s missing or ignoring obvious red flags about the Russian enterprise, the perception would still be problematic. (Neither the Clinton campaign nor the Clinton Foundation responded to requests for comment.) What is known is that the State Department recruited and facilitated the commitment of billions of American dollars in the creation of a Russian “Silicon Valley” whose technological innovations include Russian hypersonic cruise-missile engines, radar surveillance equipment, and vehicles capable of delivering airborne Russian troops.
A Russian reset, indeed.
Naturally, the Hillary campaign did not reply to any requests from Schweizer on the report. But we are comfortable that HRC’s response would likely be along the lines “what difference at this point does it make?”
- "This Whole Mania Will End Tragically" – Impermanence & Full-Cycle Thinking
Excerpted from John Hussman's Weekly Market Comment,
My friend and teacher Thich Nhat Hanh once said, “It is not impermanence that makes us suffer. What makes us suffer is wanting things to be permanent when they are not. Wilting flowers do not cause suffering; it is the unrealistic desire that flowers not wilt that causes suffering.”
Full-cycle thinking
I should begin this comment by emphasizing that our current investment outlook is driven by the combination of market conditions that we observe at the moment, considering both valuations and market action, with components that include the behavior of internals, trend-following measures, sentiment, interest rate behavior, and other factors. Those conditions will change. The chart below shows the cumulative total return of the S&P 500 in the expected return/risk classification that we presently identify, based on observable evidence. This particular classification spans about 10% of periods across market history, and captures a cumulative market loss of over 91%.
I’ve placed a little inset in the chart, showing a histogram of weekly returns that comprise that 91% cumulative loss in the S&P 500, as well as the probability distribution that we infer from those returns. Notice that while the cumulative progress of the S&P 500 in this return/risk classification may mislead investors to believe that something is going wrong if the market isn’t dropping like a rock, the actual weekly market outcomes that produce that seemingly stair-step decline include a large number of flat or positive returns.
What really produces the awful cumulative market return in this particular classification is what I call “unpleasant skew” – the single most probable outcome is actually a small gain, but gains are regularly overwhelmed by abrupt, wicked losses that wipe out weeks or months of upside progress in one fell swoop. If you look at the edges of that probability curve, you’ll see that it has a long “left tail” and a short “right tail,” meaning that large moves are skewed to the downside, and steep losses are far more likely than strong gains. That’s a standard feature of a steeply “overvalued, overbought, overbullish” environment, particularly when market internals don’t feature robust and favorable uniformity.
The present, strikingly negative market return/risk profile will change. I would certainly prefer this change to feature a steep retreat in valuations, followed by an early improvement in market action, which is an outcome that would shift the expected return/risk classification to the most favorable one we identify across history, but we’ll take the evidence as it arrives. Understand now that my identification as a “permabear” is an artifact of challenges we encountered after my 2009 insistence on stress-testing our methods against Depression-era data. I’ll emphasize again that our present methods (reflecting our mid-2014 adaptations) would encourage a constructive or aggressive investment stance across about 71% of market history, including significant portions of recent market cycles.
We know very well that maintaining a patient, value-conscious, historically-informed discipline does, in fact, require patience and discipline. We’re committed to that discipline, we’ve always attempted to adapt it to new evidence, and we certainly enjoyed the benefits of that in complete market cycles prior to the recent speculative half-cycle advance.
I’ve been asked whether it’s frustrating to maintain a defensive outlook when the S&P 500 has made new highs. The answer is that while we experienced great frustration in this half-cycle prior to the adaptations we introduced in mid-2014, we’re quite comfortable with our present outlook because we know how frequently the same investment discipline that makes us defensive here would have encouraged a constructive or aggressive outlook in market cycles across history, including recent ones, as conditions have changed. While it’s true that our own outlook is often uncorrelated or inversely correlated with that of others, we’ve never taken a hit as deep as the 2000-2002 or 2007-2009 losses in the S&P 500, and certainly nowhere near those of the Nasdaq.
The completion of a market cycle dramatically changes compound arithmetic. A fairly run-of-the-mill completion of the current cycle would wipe out the entire total return of the S&P 500 since 2000. In an advance that’s longer in the tooth than any speculative episode except the one that ended with the 2000 peak, and with the most reliable valuation measures more extreme than at any peak other than 1929 and 2000, one might consider Kenny Rogers’ advice: never count your money while you’re sitting at the table.
It remains clear that every advance in a speculative market transforms “expected future return” into “realized past return,” leaving less and less on the table for long-term investors. Over the completion of every market cycle, that process is also reversed, and as prices collapse, poor prospects for long-term return are transformed into strong ones. My error in the recent half-cycle was underestimating how dismal the long-term returns were that investors would be willing to accept (and, identically, how extreme the valuations were that investors would be willing to pay). We had to abandon the belief that any amount of historically-informed rationality might prevail among policy makers or investors, without abandoning tools that would help us to navigate a deranged financial environment. In the presence of zero interest rates, previously reliable “overvalued, overbought, overbullish” warnings were not enough. One had to wait for market internals to deteriorate, indicating a subtle psychological shift toward increasing risk-aversion, before adopting a hard-negative market outlook (see the “Box” in The Next Big Short for the full narrative).
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That’s where we differ from speculators who insist on the permanence of the recent bull market; who, ignoring the ineffectiveness of persistent monetary easing during the 2000-2002 and 2007-2009 collapses, rely on central-bank stick-saves to ratchet the markets along a permanently high plateau. To deny impermanence is to invite suffering, and unfortunately, no amount of evidence seems capable of averting the belief of speculators in permanence. So they will suffer.
“Sell everything”
At present, the greatest risk of ignoring impermanence is the belief that market risk has been removed from any consideration, and that even the most obscenely overvalued markets should never be sold. We can see that belief reflected in current price/volume data, as the post-Brexit plunge in interest rates mesmerized investors and prompted a low-volume “sellers strike.” As a security moves from one level of overvaluation to an even more extreme level of overvaluation, looking over one’s shoulder at positive past returns can reinforce the notion that the advance will never end. But extreme valuations imply dismal future returns, and that’s largely forgotten amid the eager lip-smacking of investors for ever lower or even more negative interest rates.
Understand that at a 10-year Treasury yield of 1.45%, investors stand to earn a cumulative total return of about 15% on those bonds between today and their maturity a decade from now. If one invests at current prices, nothing will make that long-term return better. Driving interest rates to negative levels in the interim won’t change the arithmetic. It would only front-load the returns, leaving only losses available to investors for the remaining portion of the decade. Put differently, the most that investors can expect to gain in 10-year Treasury bonds over any horizon, without subsequently giving it back over the coming decade, is about 15%; unless they actually sell at rich valuations and poor long-term yields.
The urging of central banks, which has become nearly a form of propaganda, is that there will always be a lower rate, a higher price, and a greater fool. The effect of this is not to repeal market cycles, but to extend their recklessness in a way that increases the risk of Depression. The majority of global debt is now “covenant lite,” providing little protection against bankruptcy. Accordingly, recovery rates have already fallen to the lowest level in history, and we haven’t even seen a recession.
Likewise, the most reliable valuation measures imply that stock market investors can expect a cumulative total return in the S&P 500 of less than 20% over the coming 12-year period, all of that from dividends. This projection is robust to assumptions about future growth and interest rates, as detailed in Rarefied Air: Valuations and Subsequent Market Returns. We can’t rule out the front-loading of those returns either, and we’ll take our cues from market internals and related factors. But again, we estimate that the most investors can expect to gain in the S&P 500 over any horizon, without giving it back by the end of the coming 12-year period, is less than 20%; unless they actually sell at rich valuations.
Frankly, my opinion is that we are at the peak of the third speculative episode since 2000, and I doubt that the S&P 500 will approach or exceed current levels again until late in that 12-year horizon. However, we remain more flexible toward changes in market conditions and the associated investment outlook than observers might imagine. Even at current extremes, we could embrace an outlook that might be described as “constructive with a safety net,” provided that we see a greater improvement in market internals across a broad range of individual stocks, industries, sectors and security types (when speculators are risk-seeking, they tend to be indiscriminate about it). That possibility would be particularly relevant if short-term interest rates were to drop back into single basis points. There’s no question that a robust shift to fresh speculation would make long-term matters even worse, but that’s the point of a safety net. In any event, I’m quite certain that the range of investment conditions in the coming 2-3 year period, and our response to them, will be far more varied than many appear to expect.
The following charts bring the valuation picture up-to-date. The first shows the ratio of nonfinancial market capitalization to corporate gross value-added. MarketCap/GVA is more strongly correlated with actual subsequent S&P 500 total returns than a score of alternative measures we’ve examined across history. It is also generally consistent with the broader class of reliable valuation measures (Shiller P/E, market cap/GDP, Tobin’s Q) that are defined by the fact that they mute the impact of cyclical variability in profit margins.
The chart below shows MarketCap/GVA on an inverted log scale (blue line, left scale), along with the actual subsequent S&P 500 annual nominal total return over the following 12-year period (red line, right scale).
I should note that corporate debt as a fraction of corporate gross value-added has surged to the highest level in history. As profits have begun to stumble, companies have aggressively issued debt, using the proceeds to repurchase stock in order to boost per-share earnings. The problem is that even today’s depressed corporate yields are higher than the prospective total return we estimate for U.S. stocks over the coming 10-12 year period. As a result, stock repurchases, far from being a benefit to shareholders, represent a destruction of shareholder value. The only shareholders who benefit from stock repurchases here are those who are cashing out, leaving remaining shareholders to hold a more concentrated and leveraged bag over the completion of this cycle.
As for corporate bonds, be sure to distinguish stated yield from realized yield. Over the completion of this cycle, buyers of corporate debt are unlikely to realize those stated yields once defaults kick in and low recovery rates eat into them.
This whole speculative mania will end tragically. How did we not learn this from 2000-2002, or 2007-2009, or the collapse of every other mania in history? My sense is that it’s a mistake to assume that yield-seeking hasn’t been fully exhausted across every class of securities. The notion that some “pocket” of value and opportunity remains untapped is largely based on a misunderstanding of yield relationships (e.g. the Fed Model). While we do still estimate a positive expected return/risk profile in precious metals shares, even these will be vulnerable if we observe even modestly greater dollar strength or slightly lower inflation. Meanwhile, there’s some potential for Treasury yields to decline a bit further in the event of an economic softening, but at this point, even that is more a speculation than an investment. The bottom line is that we’re inclined to limit risk exposure in every class of investment here.
Over the weekend, Jeff Gundlach of DoubleLine observed, correctly I think, that investors have “entered a world of uber complacency,” advising “Sell everything. Nothing here looks good. You can’t save your economy by destroying your financial system.” Likewise, Jim Grant of Grant’s Interest Rate Observer was asked by Barron’s where investors might find opportunities for yield. He replied “I’m stumped. I’m not going to try to find opportunities where they can’t be found.”
For those who insist that there is always a bull market somewhere, I would suggest that the most likely bull market to emerge here will be in bear market assets. Fortunately, inevitable periods of investor panic, speculative collapse, and improved valuation can shift market return/risk prospects substantially, which creates new opportunities for conventional assets. Long live impermanence.
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Investors are currently paying extravagant multiples on cyclically elevated earnings, at a point where a misplaced focus on debt-financed consumption and yield-seeking speculation has ravaged U.S. real investment and the accumulation of productive capital, setting the stage for persistently anemic economic growth.
The insistence of central banks on promoting yield-seeking speculation, a game that always ends in destruction, reminds me of the 1983 Cold War movie “War Games” where a teenage Matthew Broderick hacks into a Defense Department computer called WOPR, and launches a “global thermonuclear war” simulation that’s mistaken for the real thing. How much yield-seeking speculation do central banks have to provoke, and how much do future economic prospects have to be injured, before they stumble onto the same conclusion as WOPR: “A strange game. The only winning move is not to play.”
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