Today’s News 3rd February 2016

• The Coming Revaluation Of Gold

  Submitted by Hugo Salinas Price via Plata.com.mx,

  The current melt-down of the world's debt bubble is likely to continue in the course of the next months. The secular trend to expansion of credit has morphed into contraction and liquidation. It is my opinion that the new trend is now established and no action by any of the Central Banks (CB) that issue reserve currencies will do anything at all to reverse that trend.

  Sandeep Jaitly thinks that the desperate reserve-issuing CBs – the US Fed, the ECB, the Bank of England and the Japanese CB – may resort to programs of QEP, by which he means "Quantitative Easing for the People". This quantitative easing will mean putting money into the hands of the populations by rebates on taxes, invented make-work schemes or any other excuse to furnish the people with the famous "helicopter money", to get them to spend.

  As the present crisis deepens and given our experience with the way our so-called “economists” think, we can reasonably expect such programs to be launched. Nevertheless, the present trend of world economic contraction will not be reversed by any ad hoc program. The world’s expectations – positive for growth since WW II – have turned negative. This is an event of such magnitude that no “QE” will have any effect upon the final outcome: debt collapse.

  The growing fear in the world's markets arises from the recognition on the part of indebted corporations and individuals that their debt burdens are increasing due to devaluations of their national currencies. International investors are attempting to reduce their exposure. “Hot money”, invested in countries which offered higher interest rates, now wants to go home. In recent years of bonanza, foreigners borrowed some $11 trillion dollars, in various Reserve Currencies, to invest in their own countries. Of this total, it is calculated that about $7 trillion of those dollars are denominated in dollars. The debtors are now attempting to pay-off their dollar loans, and this has the effect of lowering the value of their own currencies with respect to the US Dollar, thus aggravating the situation. There is a loss of confidence in national currencies, producing Capital flight to the rising Dollar, because the countries that issue those currencies are no longer able to maintain export surpluses against the reserve-issuing countries, and are thus unable to increase reserves and are actually losing these reserves. The export-surpluses are disappearing in the "rest of the world" because the reserve-currency countries, plus China, are in an economic slump (essentially attributable to excessive debt) and are reducing their consumption of imports, thus reducing the exports of the export-surplus countries.

  The loss of Reserves on the part of the countries which depend on export-surpluses for economic health makes the accumulated debt burden in the world increasingly unsustainable; investors around the world are worried that some of their assets (which are actually debt instruments, that is to say various sorts of promises to pay) may turn out to be duds, and they are trying to find ways to protect themselves – and Devil take the hindmost!

  Whatever expedients are implemented, the final outcome of the unprecedented economic contraction in the world will have to be the revaluation of gold reserves, as desperate governments of the world resort to gold to preserve indispensable international trade. The revaluation of gold reserves held by Central Banks will be the only alternative for countries seeking to retain a minimum of international trade to supply their economies, whether they are based on agriculture, on manufacturing or on mining.

  The amount of gold held by any particular country will not be the important factor in maintaining operating economies, because even a small amount of gold will be sufficient for that purpose; the reason being, that gold coming into newly rediscovered importance, no country will be able to maintain either trade surpluses or trade deficits. The first case would imply that other countries are sending their precious gold to the surplus export countries, but the scarcity of gold and its vital importance will not permit other countries to lose their gold to the (would-be) surplus-producing countries. In the second case, the trade-deficit countries would immediately correct their activity by devaluing their currencies ipso facto, rather than continue to lose their precious gold to cover their trade-deficits: devaluation would put an immediate stop to the excess of imports over exports. Governments resorting to credit-creation to fund their deficits would find themselves limited to balanced budgets; otherwise, their budget deficits funded by credit-creation would spill over into excessive imports and the consequent necessity for immediate devaluation of their currency.

  Only gold-producing countries will be able to run trade deficits, limited to the amount of gold they produce to pay for such deficits.

  Thus, the revaluation of gold will have the beneficent effect of restoring the world to a healthy condition, lost a century ago, of balanced trade and balanced national budgets.

  The discipline of gold as Reserves backing currency at a revalued price will restore order to a world that has refused to adopt the necessary discipline until forced to do so in the desperate situation now evolving, where there will be no other alternative but to accept the detested fiscal and financial discipline imposed by gold.

  We do not know the true amount of gold held by the world's central banks, because it is a closely held secret. However, we need not know that figure. Whatever gold there is in CB vaults will be sufficient, for the reasons we have given.

  Nor do we know at what price, in dollars, the price will be set, or how it will be set. However, given the truly astronomic amounts of debt in existence, a very high price will be necessary to "liquefy" i.e. make payable remaining debt, whatever the amount remaining after the purge which is now in process. The very high price of gold will mean that all debt instruments will be subject to large losses in terms of gold value. The revaluation of gold will reduce the weight of the present debt overhang upon the world.

  The revaluation of gold does not mean that prices of goods and services will rise in tandem with the higher price of gold. Established prices will by and large remain the same prices that existed before the revaluation. However, prices will have to re-adjust to reflect the new economic realities. Many goods that we have taken for granted will disappear, as their artificial cheapness vanishes.

  Another characteristic of a world that has begun to trade with gold-backed currencies as money, will be that one-way flows of gold from one region to another, or from groups of countries to a single country, will be impossible; such a flow would become a permanent drain on gold for some region or some country, and a permanent increase in gold for some region or some country. Eventually the gold would tend to pile up in some region or country, leaving the rest of the world with a lack of gold.

  The oil-producing countries will have to adjust the gold price of their oil exports to balance with the gold price of their imports, plus the gold value of their investments abroad.

  For a visual appreciation of the coming conditions, we have provided a few graphs. The first column illustrates the present condition, with present CB Reserves at $11.025 Trillion dollars, plus an estimate of CB Reserves of 31,110 tons of gold at $1,100 Dollars an ounce (according to an authoritative calculation of 183.000 tons of gold in existence at present, of which 17% are calculated to be held as Reserves by Central Banks around the world). The second column presents the present CB Dollar Reserves, below CB reserve gold revalued at $22,000 Dollars an ounce. The third column presents the present CB Dollar Reserves, below 50,000 tons of reserve gold revalued at $50,000 Dollars an ounce. We use the larger figure for CB gold, because some analysts think that China, and also Russia, have far larger gold reserves than they disclose publicly.

   

  

  Why do we use $22,000 and $50,000 Dollars an ounce? Because other thinkers have estimated a necessary revaluation of gold, with various figures between a low price of $10,000 Dollars and ounce and a high price of $50,000 Dollars an ounce. So we arbitrarily selected $22,000 Dollars an ounce and $50,000 Dollars an ounce. Take your pick. The price and the quantity of gold in Central Bank vaults are really immaterial; the facts will be known eventually, and the result will be what we have pointed out above: the restoration of balanced trade and balanced budgets in our present highly disorderly world.

  Once the world's currencies are "gold-backed", then the gold held by individuals, trusts or corporations will cease to lie lifeless in stocks of gold. All gold will have become money and will spring to life in furthering economic activity: the revaluation of gold by Central Banks will also revalue, simultaneously, the 151,890 tons of gold which are thought to be in private hands at present – 183,000 tons total, minus 31,110 tons held by Central Banks = 151,890 tons in private hands.

  For China, the revaluation of gold means an end to the great export trade of Chinese manufactures, with the consequent inevitable, and surely very wrenching re-ordering of its economy. Perhaps this explains why the Chinese government has been urging the population of China to purchase gold.

  China, which is rumored to have far more gold in its Reserves than it says it does, might have the opportunity to lend say, 50 tons of the yellow metal to each of 50 hard-hit countries, for a total of an insignificant 2,500 tons out of its large stash. In return, the recipient countries would place Chinese on the Boards of their Central Banks and as supervisors in their National Treasuries; in addition, China might obtain privileges to invest in the extraction of scarce natural resources or in agriculture – China has a huge population that will require establishing sources of food. Nothing comes without a price, and "he who has the gold makes the rules". The Chinese are well-known as consummate merchants and as people who know how to live unobtrusively in foreign countries. China's influence may extend around the world, with the world's return to gold-backed currencies.

  For the US, the revaluation of gold means an end to its ability to obtain any goods it desires, in any quantity, in any place, at any price by simply tendering today's mighty fiat Dollar in mock-payment, in exchange for those goods. The US economy will have to suffer a huge and also painful, wrenching adjustment to its new situation in a different world, where balanced trade and balanced budgets are relentlessly imposed by the new status of gold as international money. On the positive side, US manufacturing will immediately spring to life to supply the US market; employment and incomes will surge with the rebirth of US manufactures.

  Once all currencies are "gold-backed" by revalued gold reserves, then gold is once again the international money, and the Dollar becomes nothing more than the national currency of the US, as quantities of gold become the international means of settling trade. We need not worry ourselves about how this will take place, because that it will happen is a certainty. All prices of goods and services around the world will really be gold prices, since all currencies will be redeemable at sight, in gold.

  Such is the significance of the coming revaluation of gold.

   

  

  

  

  

  

• "We Need To Rise Up": Bilked Chinese Investors Call For Nationwide Uprising After Massive Ponzi Uncovered

  Well, don’t say we didn’t warn you.

  Just yesterday, in the course of documenting the largest ponzi scheme the world has ever known (in terms of number of victims), we remarked that if China’s beleaguered masses needed yet another excuse to rise up and stage massive street protests, they got one in the form of online P2P lender Ezubao, which defrauded nearly a million people.

  Ezubao’s model wasn’t exactly complicated. Investors, they said, could earn between 9% and 15% by funding a variety of projects presented on the company’s website. When the money came in, management simply absconded with it all and attempted to repay old investors with new investors’ money.

  34-year-old Ding Ning – the company’s founder – had a penchant for spending investors’ hard earned money on things like CNY12 million pink diamond rings. “Among gifts that Yucheng Chairman Ding Ning gave his president, Zhang Min, were a $20 million Singapore villa, a $1.8 million pink diamond ring, luxury limousines and watches and more than $83 million in cash,” Reuters recounts, before adding that “Zhang, the group president who was marketed as ‘the most beautiful executive in online finance’, said on state broadcaster CCTV that Ding asked her to buy up everything from every Louis Vuitton and Hermès store in China, “and go overseas to buy more if that wasn’t enough.”

  

  (Ding Ning at an “undisclosed location”)

  According to a highly amusing Google translation of a Xinhua story, Ding Ning and “several closely related groups of female executives, their private life extremely extravagant, spendthrift to suck money.”

  Yes, “spendthrift to suck money” and if there was anything Ezubao was particularly adept at, it was “sucking money” – from 900,000 unsuspecting Chinese who staged protests in December following the government’s move to freeze the company’s assets.

  “Expect more protests to come,” we warned.

  Well sure enough, disgruntled investors are now uniting in a nationwide “rights protection” movement. Their first order of business: to call for three days of protests.

  “If we don’t protect our rights, make appeals and take other drastic action within three days, we will recover little,” said a bulletin making the rounds among Ezubao investors. “We need to rise up across the country and let the government know that the people’s bottom line is the return of their capital. If it is not returned our movement will not stop!”

  Many investors were lured in by the company’s flashy advertising campaigns and gimmicks. “Ezubao expanded rapidly across the country by advertising extensively on Chinese Central Television.” FT writes. “It sponsored a forum about the country’s parliament on Xinhua’s website and sponsored popular events such as the China Open tennis tournament and emblazoned high-speed rail cars with its logo.”

  “When you got on the train, there was an announcement saying: “‘Welcome aboard Train Ezubao’,” a company employee who lost about CNY100,000 yuan in the scheme told Reuters.

  Investors who put up at least CNY150,000 were given five-gram commemorative gold bars. “I feel terrible,” an Ezubao investor surnamed Liu who said she lost CNY800,000 lamented. “I haven’t dared tell my husband yet.”

  “I gave Ezubao Rmb250,000 because of their association with government activities and news outlets,” one investor told FT. “Of course we invested because of the advertising on CCTV and the high-speed trains,” another said.

  “Of course” they invested. They saw an ad on a train.

  This mirrors the sentiments expressed by the millions of retail investors who watched helplessly last summer as their life savings were vaporized by the harrowing decline on the SHCOMP.

  It also reminds us of what happened to Fanya Metals chief Shan Jiuliang who was kidnapped by a mob of angry investors and dropped off at the police station back in August. Although Fanya was probably less of a fraud than Ezubao, the underlying story is the same: unsophisticated Chinese investors were bamboozled and once they realized they had been had, they were out for blood. 

  It’s not likely that Ding Ning will see the light of day anytime soon, but if he were to go free, he might quickly wish he was back in prison given the fate Shan Jiuliang suffered early one morning last summer…

  

  So stay tuned, because judging from the tone of the “rights protection movement” bulletin excerpted above, the villagers may be about to rise up in China.

  Oh, and as for whether there may be other Ding Nings and Ezubaos lurking around in China just waiting to buckle under the weight of their own extraordinary ponzi-ness, consider this from Reuters: 

  “By November, there were over 3,600 P2P platforms as the industry raised more than 400 billion yuan, according to the China Banking Regulatory Commission (CBRC). More than 1,000 of those were problematic.”

  

  

  

  

  

• The One Asset Class that Matters

  By EconMatters

  

  The modern era of financial markets means that basically there are two assets: Risk On and Risk Off. The last two days we have been in Risk Off mode. We might switch to Risk On mode if the economic data reports coming support an optimistic view of the economy.

  © EconMatters All Rights Reserved | Facebook | Twitter | YouTube | Email Digest | Kindle  

  

  

  

  

• Kuroda Suggests "No Limit" To More NIRP Measures To Stall Japanese Bond Yields, Stocks, USDJPY Plunge

  With Nikkei 225 down 800 points from post-NIRP highs and USDJPY having almost roundtripped, there is little wonder that Japanese government bond yields are collapsing to imply considerably deeper NIRP to come. With 10Y JGBs on the verge of a negative yield, 2Y yields are now at -17bps (well below Kuroda's -10bps level). Japanese bank stocks are a bloodbath with Nomura leading the way lower.

   

  We're gonna need more NIRP…

  • *JAPAN'S TOPIX INDEX FALLS 3.3% TO 1,404.75 AT MORNING CLOSE
  • *JAPAN'S NIKKEI 225 FALLS 3.1% TO 17,194.17 AT MORNING CLOSE

  

   

  And that is what bonds are implying…

  • *JAPAN'S 2-YEAR YIELD FALLS TO RECORD MINUS 0.17%
  • *JAPAN'S 10-YEAR BOND YIELD FALLS TO RECORD 0.045%

  

   

  With the entire curve to 8Y below BoJ's -10bps level…

  

   

  And Japanese bank stocks are plunging…

  

   

  Led by Nomura's 11%-plus plunge – the most since 2011…

  

   

  As none other than Nomura itself admits, Further rate cuts likely needed to attain inflation target…

  In its newly released Outlook Report, the BOJ is forecasting attainment of its +2% inflation target by FY17 H1. However, we expect the ongoing improvement in the BOJ's preferred measures of the underlying trend in prices–ie, the core-core CPI (headline CPI ex food (except alcoholic beverages) and energy) and headline CPI ex fresh food and energy–to grind to a halt. Additionally, the base wage increases negotiated in this spring's unionized wage negotiations, which BOJ Gov. Haruhiko Kuroda is closely monitoring, look likely to be somewhat restrained. Given such an environment, the BOJ will likely ease again…The BOJ seems to have the latitude to cut its interest on excess reserve (IOER) rate to at least -0.5% or thereabouts.

  Wow – that did not take long…

  • *KURODA: POSSIBLE TO CUT NEGATIVE RATE FURTHER IF NEEDED
  • *KURODA: NO LIMIT TO MONETARY EASING MEASURES
  • *KURODA: WILL EXPAND EASING IF NEEDED FOR PRICE TARGET
  • *KURODA: BOJ WILL DO WHATEVER IT CAN TO REACH PRICE TARGET
  • *KURODA: BOJ TO KEEP LOOKING FOR INNOVATION IN MEASURES
  • *KURODA: BOJ NEEDS TO DEVISE NEW TOOLS IF MEASURES INSUFFICIENT

  Who could have seen that coming?

  Will BOJ cut rates to -0.2% tonight: stay tuned

  — zerohedge (@zerohedge) February 2, 2016

  "Peter Pan" policy has officially arrived.. .and the market ses straight through it…

  

  

  

  

  

  

• Why Bernie Sanders Has To Raise Taxes On The Middle Class

  Submitted by Daniel Bier via The Foundation for Economic Education,

  Willie Sutton was one of the most infamous bank robbers in American history. Over three decades, the dashing criminal robbed a hundred banks, escaped three prisons, and made off with millions. Today, he is best known for Sutton’s Law: Asked by a reporter why he robbed banks, Sutton allegedly quipped, “Because that’s where the money is.”

  Sutton’s Law explains something unusual about Bernie Sander’s tax plan: it calls for massive tax hikes across the board. Why raise taxes on the middle class? Because that’s where the money is.

  The problem all politicians face is that voters love to get stuff, but they hate to pay for it. The traditional solution that center-left politicians pitch is the idea that the poor and middle class will get the benefits, and the rich will pay for it.

  This is approximately how things work in the United States. The top 1 percent of taxpayers earn 19 percent of total income and pay 38 percent of federal income taxes. The bottom 50 percent earn 12 percent and pay 3 percent. This chart from the Heritage Foundation shows net taxes paid and benefits received, per person, by household income group:

  

  But Sanders’ proposals (free college, free health care, jobs programs, more Social Security, etc.) are way too heavy for the rich alone to carry, and he knows it. To his credit, his campaign has released a plan to pay for each of these myriad handouts. Vox’s Dylan Matthews has totaled up all the tax increases Sanders has proposed so far, and the picture is simply staggering.

  Every household earning below $250,000 will face a tax hike of nearly 9 percent. Past that, rates explode, up to a top rate of 77 percent on incomes over $10 million.

  

  Paying for Free

  Sanders argues that most people’s average income tax rate won’t change, but this is only true if you exclude the two major taxes meant to pay for his health care program: a 2.2 percent “premium” tax and 6.2 percent payroll tax, imposed on incomes across the board. These taxes account for majority of the new revenue Sanders is counting on.

  But it gets worse: his single-payer health care plan will cost 80 percent more than he claims. Analysis by the left-leaning scholar Kenneth Thorpe (who supports single payer) concludes that Sanders’ proposal will cost $1.1 trillion more each year than he claims. The trillion dollar discrepancy results from some questionable assumptions in Sanders’ numbers. For instance:

  Sanders assumes $324 billion more per year in prescription drug savings than Thorpe does. Thorpe argues that this is wildly implausible.

  “In 2014 private health plans paid a TOTAL of $132 billion on prescription drugs and nationally we spent $305 billion,” he writes in an email. “With their savings drug spending nationally would be negative.” 

  So unless pharmaceutical companies start paying you to take their drugs, the Sanders administration will need to increase taxes even more.

  Analysis by the Tax Foundation finds that his proposed tax hikes already total $13.6 trillion over the next ten years. However, “the plan would [only] end up collecting $9.8 trillion over the next decade when accounting for decreased economic output.”

  And the consequences will be truly devastating. Because of the taxes on labor and capital, GDP will be reduced 9.5 percent. Six million jobs will be lost. On average, after-tax incomes will be reduced by more than 18 percent.

  Incomes for the bottom 50 percent will be reduced by more than 14 percent, and incomes for the top 1 percent will be reduced nearly 25 percent. Inequality warriors might cheer, but if you want to actually raise revenue, crushing the incomes of the people who pay almost 40 percent of all taxes isn’t the way to go.

  These are just the effects of the $1 trillion tax hike he has planned — and he probably needs to double that to pay for single payer. Where will he find it? He’ll go where European welfare states go.

  Being Like Scandinavia

  Sanders is a great admirer of Scandinavian countries, such as Denmark, Sweden, and Norway, and many of his proposals are modeled on their systems. But to pay for their generous welfare benefits, they tax, and tax, and tax.

  Denmark, Norway, and Sweden all capture between 20-26 percent of GDP from income and payroll taxes. By contrast, the United States collects only 15 percent.

  Scandinavia’s tax rates themselves are not that much higher than the United States’. Denmark’s top rate is 30 percent higher, Sweden’s is 18 percent higher, and Norway’s is actually 16 percent lower — and yet Norway’s income tax raises 30 percent more revenue than the United States.

  The answer lies in how progressive the US tax system is, in the thresholds at which people are hit by the top tax rates. The Tax Foundation explains,

  Scandinavian income taxes raise a lot of revenue because they are actually rather flat. In other words, they tax most people at these high rates, not just high-income taxpayers.

   

  The top marginal tax rate of 60 percent in Denmark applies to all income over 1.2 times the average income in Denmark. From the American perspective, this means that all income over $60,000 (1.2 times the average income of about $50,000 in the United States) would be taxed at 60 percent. …

   

  Compare this to the United States. The top marginal tax rate of 46.8 percent (state average and federal combined rates) kicks in at 8.5 times the average U.S. income (around $400,000). Comparatively, few taxpayers in the United States face the top marginal rate.

  The reason European states can pay for giant welfare programs is not because they just tax the rich more — it’s because they also scoop up a ton of middle class income. The reason why the United States can't right now is its long-standing political arrangement to keep taxes high on the rich so they can be low on the poor and middle.

  

  Where the Money Is – And Isn’t

  As shown by the Laffer Curve, there is a point at which increasing tax rates actually reduces tax revenue, by discouraging work, hurting the economy, and encouraging tax avoidance.

  

  Bernie’s plan already hammers the rich: households earning over $250,000 (the top 3 percent) would face marginal rates of 62-77 percent — meaning the IRS would take two-thirds to three-quarters of each additional dollar earned. His proposed capital gains taxes are so high that they are likely well past the point of positive returns. The US corporate tax rate of 40 percent is already the highest in the world, and even Sanders hasn’t proposed increasing it.

  The only way to solve his revenue problem is to raise rates on the middle and upper-middle classes, or flatten the structure to make the top rates start kicking in much lower. You can see why a “progressive” isn’t keen on making more regressive taxes part of his platform, but the money has to come from somewhere.

  The bottom fifty percent don’t pay much income tax now (only $34 billion), but they also don’t earn enough to fill the gap. Making their taxes proportionate to income would only raise $107 billion, without even considering how the higher rates would reduce employment and income.

  The top 5 percent are pretty well wrung dry by Sanders’ plan, and their incomes are going to be reduced by 20-25 percent anyway. It’s hard to imagine that there’s much more blood to be had from that stone.

  But households between the 50th and the 95th percentile (incomes between $37,000 to $180,000 a year) earn about 54 percent of total income — a share would likely go up, given the larger income reductions expected for top earners. Currently, this group pays only 38 percent of total income taxes, and, despite the 9 percent tax hike, they’re comparatively spared by the original tax plan. Their incomes are now the lowest hanging fruit on the tax tree.

  As they go to the polls this year, the middle class should remember Sutton’s Law.

   

  

  

  

  

  

• San Francisco Fed Apologizes For "Iowa Is… Iowa" Twitter Fiasco

  In mid-January, just as the market was crashing due to among other things concerns that the economy was prolapsing, we had a brief exchange with the Atlanta Fed asking them why they waited until the after the close of trading to report that its Q1 GDP estimate had crashed to the lowest yet, at 0.6% (incidentally almost exactly what the final Q1 GDP print was), a number that is traditionally revealed at or before noon. The Fed’s answer: “Apologies for the late-day data release. Nothing more nefarious than technical difficulties, which we believe have been resolved.”

  

  Said otherwise, just a glitch.

  Shortly thereafter, following a Zero Hedge exclusive laying out the latest policy directives by the Dallas Fed to lenders with substantial exposure to the oil and gas sector, namely to suspend mark-to-market of stressed loan books, while urging banks to avoid cascading bankruptcies of energy debtor counterparties, the Dallas Fed decided to lie and state unofficially (well, on Twitter), that there was no truth to our story.

  

  The same Fed then “responded” to our subsequent FOIA request by providing absolutely none of the information required, because it turns out, the Fed “does not maintain or possess calendars of Federal Reserve staff.”

  Said otherwise, people at the Fed come and go and nobody knows anything.

  Then, last night, shortly after the Iowa caucus had concluded, we noticed something just as disturbing: the “apolitical” San Francisco Fed, which tends to be quite active on Twitter, made what amounted to a derisively political comment, one which it promptly deleted but not before we managed to screengrab it:

  

  We had some follow up questions:

  We wonder: does the San Fran Fed deny there is any truth to this tweet? Or maybe, like the Dallas Fed, it simply does not keep a log of what it tweets?

   

  That aside, perhaps the San Francisco Fed and its staffers can explain what “matters”?

   

  Is it Goldman Sachs? Or JPMorgan?

   

  Or any other bank that the “Board” has decided it is time to bailout?

  To our surprise, the SF Fed did not have any retorts. In fact, the otherwise quite chatty Twitter account was even more quiet than Donald Trump’s, which prompted this question from us earlier:

  no tweets from @sffed today?

  — zerohedge (@zerohedge) February 2, 2016

  Within minutes of our question we received the following response from the heretofore mute San Francisco Fed:

  (1/2) Last night an employee mistakenly tweeted from the Bank’s account. The tweet was deleted b/c it doesn’t represent the Bank’s views.

  — San Francisco Fed (@sffed) February 2, 2016

  (2/2) We apologize for this mistake; we are reviewing our policies & practices to ensure that this does not happen again.

  — San Francisco Fed (@sffed) February 2, 2016

  Actually, the only reason why the Fed apologized is because it was caught. As for the now ex-employee, we can only assume he or she will be a seasonal adjustment in this week’s initial unemployment insurance claims number.

  But what is more disturbing is that a pattern is emerging: a Federal Reserve plagued by “non-nefarious” technical difficulties, one where nobody has any idea where anyone is going or what anyone is doing (and where there seemingly are no records and no accountability), and one where random employees can take over official Fed communication channels to disseminate their biased, political views and who knows what else.

  In retrospect, it is no surprise that the Fed is losing credibility with every passing day.

  That said, we are delighted that in under three weeks, we have interacted directly with three regional Feds. At this rate soon Janet Yellen, if not Ben Bernanke himself, will finally address our concerns after 7 years of day after day demonstrating to the world and to the Federal Reserve how its actions have led this country to ruin, something everyone else is finally realizing too. Even if it is on Twitter.

  

  

  

  

• Moodys Warns Defaults Set To Rise As Liquidity, Financial, & Monetary Stress Soar

  US monetary conditions are the tightest since 2009, financial conditions the tightest since 2009, and as Moody's reports today Liquidity Stress is at its worst since February 2010 – all forewarning of a notable rise in defaults in 2016… and what can the Fed do?

  Worryingly, as Credit Suisse explains, US monetary conditions are now the tightest that they have been since 2009…

  

  …At a time when financial conditions are also moving to their tightest level since 2009.

  

  This is the first time in 10 years that monetary and financial conditions are tightening at the same time. In the past, a tightening of financial conditions has tended to be accompanied by monetary easing… but The Fed seems set on hiking rates no matter what (to sustain bank earnings?)

  However, as Moody's reported today, things are worse still as their Liquidity Stress Index (LSI) jumped to 6.8% at the end of December 2015 from 6.4% in November, reaching the index's highest level since February 2010 forewarning of a rise in the default rate in 2016.

  

  The LSI for oil and gas increased to 19.6% in December from 19.3% in November as low oil prices continued to weaken liquidity and raise default risk. Among the four exploration and production companies downgraded to SGL-4, the weakest liquidity category, were Atlas Energy Holdings (Caa1 negative), California Resources Corp. (Caa1 negative) and Ultra Petroleum Corp. (Caa1 negative).

  Liquidity weakness is also starting to spread to select lower-rated issuers in other sectors, though not broadly.

  The non-oil and gas LSI rose to 3.6% in December from 3.0% in the prior month.

   

  The ratio of all SGL liquidity downgrades to upgrades was 1.74 for 2015, with 141 downgrades to 81 upgrades — the highest since 2008 when the ratio was a record 2.96. Energy has been the key driver of liquidity downgrades, followed by metals and mining, amid weakening commodities demand in major developing countries such as China.

   

  "As borrowing rates rise and credit markets tighten, companies closer to the margin will find it challenging to cost-effectively refinance their upcoming debt maturities."

   

  Moody's forecasts the US speculative-grade default rate will climb to 4.1% in November this year from 3.0% in November 2015.

  Which perhaps explains why US bank credit risk is soaring…

  

  

  

  

  

  

• The Bank Of Japan Has Betrayed Its People

  Via GEFIRA,

  The Bank of Japan’s unexpected rate cuts to negative are a desperate attempt to help out the FED and to support the dollar at the expense of the aging Japanese population.

  The negative market reaction to the FED’s rate hike of December shows that investors do not believe an economic recovery in the US is underway. Two reasons make central banks start to raise interest rates.

  • The first is that economy is doing well, and central banks have to prevent an overheated economy. But it is also a signal to investors everything is going well. In this situation, the first reaction of investors will be the opposite as central bankers planned they will and increase their investments and markets will go up.
  • The second reason central banks raise interest rates is the defensive one; the moment the economy is out of control, investors are beginning to abandon the sinking ship. The continually increasing interest rate has the task of keeping the investors aboard. Central banks in less developed economies raise rates to defend the national currency, thus preventing investors from fleeing. An increase in the interest rate can add fuel to the fire and in many cases has the opposite effect. Investors start smelling angst of the authorities and start abandoning the sinking ship. In such a situation stock markets are coming crashing down because investors withdraw from them.

  We saw this last pattern happening in the US economy after the December FED’s rate hike. As a result, the dollar-yen exchange rate is starting to decline, with the value of the dollar falling off as Japanese investors start panicking and fleeing the US market. Surely, Japanese investors know that a rate hike without an accompanying economic growth will erode every existing investment.

  There is a general misconception according to which countries drive their currency down to generate growth. People adhere to the simplistic belief that a weak currency drives exports and helps the nation to prosper. The fact is that a cheap currency creates growth by giving away real goods in exchange for IOU (I Owe Yous) or paper debt obligations that will never be repaid. The US is the beneficiary or the receiving end of the weak yen policy. Because the US continues to maintain its world hegemony, it needs a strong dollar. A strong dollar makes everything the US empire buys in the world cheap. A strong dollar causes the world to be willing to exchange real goods for printed paper dollars that have no intrinsic value, and that are issued by a country that does not have the industrial capacity to ever repay what it owes its debtors.

  The endless trade deficit the US has with Japan shows how the Japanese are prepared to provide the US with real goods without demanding tangible goods in return. Because the international press publishes trade data in dollars, the trade balance deficit seems to have been shrinking over the last years. The actual situation becomes apparent if we look at the trade deficit in yens.

  

   

  The US trade deficit with Japan is growing bigger and bigger year after year, as Japanese producers are giving away a big chunk of their production to US consumers in return for more and more US paper debt. By manipulating the yen, Japanese authorities are giving away a real part of their GDP  that they take from their people to the US empire.

  In January, the yen started to appreciate because Japanese investors withdrew their money from the shaky US economy. Not only does an expensive yen lower the purchasing power of US consumers, but it can also render the US, Asian military pivot, quite expensive. It looks like Kuroda-san, president of the Bank of Japan, got new marching orders from his US masters during his Davos visit.

  The submissive Japanese leaders have no choice but to obey their US masters and come up with a next trick to keep the yen cheap.

  The Bank of Japan does not have much room to maneuver, so it lowered the excess-deposit rate into negative territory. It was marginal from 0.1 to -0.1 and only applicable to a small number of the Japanese bank deposits at the Bank of Japan; nevertheless, the music started playing again. It will be harder for Kuroda-san to press the yen lower and come up with new tricks indefinitely.

  Investors may be fooled by the vast amount of public debt of the Japanese government, not realizing that the Japanese nation as a whole has a massive saving surplus. Some day the Bank of Japan will run out of tricks, and the yen will explode as Japanese savers will try to repatriate their savings. It will affect not only the financial markets but also the US ability to counter its Chinese rival in the Yellow Sea. For now, the desperate move of the Central Bank of Japan will not help the aging Japanese population. It will keep the financial markets happy for a short period.

  …or not even that…

  

  

  

  

  

  

• Pentagon Will Spend $3.4 Billion Next Year To Keep You Safe From "Aggressive" Russians

  The US military faces five “big challenges,” Ash Carter told the Economic Club of Washington on Tuesday.

  Those challenges are: Russia, China, North Korea, Iran, and ISIS.

  So essentially, the exact same “challenges” Washington has been trotting out for years to justify hundreds upon hundreds of billions in defense spending, only with one CIA pet project gone horribly awry added to the list.

  Despite the fact that The Pentagon’s list of threats includes all of the usual suspects, Carter contends that “today’s security environment is dramatically different than the one America has been engaged with for the last 25 years.”

  This “new” environment, Carter argues, “requires new ways of thinking and new ways of acting.”

  Developing these “new” ways of doing business militarily will apparently cost $582.7 billion. That’s the figure for The Pentagon’s 2017 defense budget and it will include the following line items.

  • $7.5 billion to fight Islamic State (which the US pretty clearly thinks is going to be sticking around for a while because after all, the next fiscal year doesn’t begin until October)
  • $71.4 billion for “strategic development”
  • $8.1 billion on “undersea warfare”
  • $1.8 billion for “munitions” (recall that the US is about to run out of bombs to drop on the Mid-East)

  Drilling down, Washington will increase military spending in Europe fourfold to $3.4 billion in an effort to deter what the Pentagon calls “Russian aggression.”

  
  

  “Almost half of the new investments Carter will propose are related to what officials see as a growing threat from Moscow, where President Vladimir Putin has demonstrated his willingness to employ Russian military might from Ukraine to Syria,” The Washington Post wrote on Monday. “Under the proposed expansion to the European Reassurance Initiative the Pentagon would increase the U.S. troop presence in Europe; expand positioning of combat vehicles and other equipment there; help allies build up military infrastructure; and train more allied troops.”

  In other words, $3.4 billion worth of (loud) sabre rattling in the Baltics.

  “This is not really a provocation or an escalation,” a senior administration official said. “Rather, it is the result of our longer term response to Russia’s foreign interventions.”

  Right. Well you can bet Russia won’t see it that way. If Moscow had 62,000 troops (the number of active duty US service members operating in Europe) in Canada and Mexico along with a variety of “equipment” and missiles, The White House would be just as ornery and hypersensitive as The Kremlin sometimes appears to be. 

  Additionally, it’s always worth noting the hypocrisy inherent in the utterances of any US official who chides another nation for “foreign interventions” when Washington has its hands in more global conflicts that we’d care to catalogue. 

  “Even as we fight today’s fights, we must also be prepared for the fights that might come 10, 20 or 30 years down the road,” Carter said on Tuesday, as though the idea of not fighting has never crossed his mind. 

  The Defense Chief, who last month used a make believe medical term (the “parent tumor”) to describe the ISIS stronghold at Raqqa, was back at it with the semantic shenanigans. “We cannot blind ourselves to the actions nations appear to choose to pursue,” he said, in a linguistically torturous allusion to Russia’s activities in Ukraine and China’s land reclamation efforts in the Spratlys. Russia and China, he added, are America’s “most stressing competitors.”

  Also “stressing” for Carter is the threat of a cyber attack which is why The Pentagon is going to spend $7 billion next year shoring up the nation’s cyber defenses and developing “offensive” capabilities. “Among other things,” Carter said, “this will help further improve DoD’s network defenses, which is critical, build more training ranges for our cyber warriors, and develop cyber tools and infrastructure needed to provide offensive cyber options (so no more sabotaged Seth Rogen movies on this defense chief’s watch).”

  So there you have it. Ash Carter is all set to make you safer in 2017 by spending nearly $600 billion of your taxpayer dollars on, i) exacerbating what amounts to a new Cold War in the Balkans, ii) buying smart bombs to drop on Sunni extremists that the CIA probably armed with more of your tax dollars, iii) making sure Kim Jong-Un can’t sabatoge any more Seth Rogen movies.

  You’re in good hands America…

  

  
  

  

  

  

  

  

• Here's How Much The Strong Dollar Hurts US Companies

  Submitted by Tony Sagami via MauldinEconomics.com,

  “At current spot rates, we would expect a significant impact to revenue and profit again in 2016.”
  —Martin Schroeter, CFO of IBM

  We’re in the middle of earnings season, and one of the themes I am hearing over and over from American companies is how the strong dollar is killing their profits.

  How strong? Since mid-2014, the US dollar has appreciated about 15% against a basket of trade-weighted foreign currencies. In 2015 alone, it was up 12%, the biggest one-year gain since the 1970s.

  

  If you’ve traveled abroad recently, you know exactly what I’m talking about.

  While a strong dollar is a positive for vacationing Americans, it is bad, bad news for American companies with significant international business because it makes US exports more expensive to foreign buyers and reduces the conversion of foreign profits from foreign currencies into dollars.

  

  And it is only going to get worse. Wall Street economists predict that the US dollar will appreciate by another 4% against the euro and by another 6% against the Japanese yen.

  In the third quarter of 2015, the strong US dollar decreased the average American company’s earnings by 12 cents per share, and a growing list of American companies are suffering even more dollar-related pain.

  Dollar Casualty #1: Kimberly-Clark

  Kimberly-Clark sells a lot of Huggies diapers all around the world. However, it reported that its 2015 revenues were down by 6%. Worse yet, it warned Wall Street that its 2016 revenues would fall by another 3%.

  That sounds like business is bad, but Kimberly-Clark is actually pulling in more sales than ever. It is just the currency impact that makes its business look awful—if it weren’t for the effect of the strong US dollar, management said sales would actually be up 3%–5%.

  

  Dollar Casualty #2: Procter & Gamble

  Procter & Gamble gets 60% of its revenues from outside of North America, so it is one of the most vulnerable companies to a rising US dollar.

  

  The company reported a 9% drop in quarterly revenues to $16.9 billion because of the dollar.

  

  Dollar Casualty #3: Johnson & Johnson

  Johnson & Johnson said its revenues were reduced by 7.5% in 2015 by currency losses.

  

  Dollar Casualty #4: Monsanto

  Monsanto is the world's largest seed company and gets 43% of its revenues from outside the US. The company just reported a loss for the fourth quarter of 2015, citing the strong dollar as one of the main reasons. It also cut its 2016 profit forecast from $4.44–$5.01 per share to $4.12–$4.79 per share.

  

  Dollar Casualty #5: DuPont

  Chemical company DuPont reported a quarterly loss of $0.29 per share, compared with a net income of $0.74 per share a year earlier. Sales slid 9.3% to $5.3 billion, but without the effect of the strong dollar, sales would have been down only 1%.

  

  A 1% decline isn’t good, but a 9.3% is horrendous.

  Dollar Casualty #6: 3M

  3M, the maker of Post-it Notes, gets about two-thirds of its revenues from outside the US, and that global reach has cost it dearly. 3M reported an 8.3% drop in profits to $1.66 per share and expects the currency effects to reduce this year’s earnings by 5%.

  “The Dollar Dog Ate My Homework”

  Those are just a few examples from last week. We are certainly going to hear a lot more companies blaming the strong dollar for disappointing earnings.

  And those the-dog-ate-my-homework excuses are going to continue for the rest of 2016.

  Here’s what you need to do: Take a look at every stock you own and find out what percentage of the company’s revenues comes from outside the US.

  If the answer is more than 40%, you should consider dumping the stock before the dollar shrinks profits (and stock price) even more.

  There are always exceptions—but fighting the strong dollar is going to be a battle that your portfolio is going to lose.

   

  

  

  

  

  

• "Liar Loans" Are Back In 2007 Housing Bubble Redux

  In the leadup to the financial crisis, lenders did some pretty silly things.

  The securitization bonanza and the attendant proliferation of the “originate to sell” model drove lenders to adopt increasingly lax underwriting standards.

  Put simply, the pool of creditworthy borrowers is by definition finite. That’s a problem because the securitization machine needs feeding. So what do you do if you’re a lender? Why, you expand the pool of eligible borrowers by making it easier to get a loan.

  And we’re not talking about a giving would-be buyers a few FICO points worth of leeway here. We’re talking about the infamous “liar loans” which produced myriad tales of a market run horribly amok as everyone from maids to strippers could buy a McMansion with little to nothing in the way of documentation.

  Well don’t look now, but the infamous Alt-As are making a comeback thanks to “big money managers including Neuberger Berman, Pacific Investment Management Co. and an affiliate of Blackstone Group LP [who] are lobbying lenders to make more of these “liar’ loans—or even buying loan-origination companies to control more of the supply themselves,” WSJ reports.

  Once again, it’s the same old story. ZIRP has left investors starved for yield and that’s herding money into riskier and riskier assets and creating demand for paper backed by everything from subprime auto to P2P loans. Alt-As can carry rates as high as 8% which obviously looks great to anyone who’s stuck squeezing 300 bps out of something you picked up during last year’s IG issuance bonanza.

  As WSJ goes on to note, the structure is a bit different this time around as large banks are steering clear of the market. “Virtually none of these Alt-A loans are being sliced and packaged into securities,” The Journal writes. “Instead, private-equity firms, hedge funds and mutual-fund companies are playing a larger role as buyers, placing the loans into private funds that are sold to institutional investors and wealthy clients.”

  Of course pooling the loans and issuing ABS versus pooling the loans and selling shares of funds backed by those loans are really the same thing. In both cases, investors are betting on a pile of possibly risky mortgages extended to borrowers who for whatever reason don’t meet the requirement for a standard 30-year fixed.

  For their part, money managers are rolling out the same tired excuse about reaching “underserved corners” of the market where unnecessary restrictions are keeping “some folks” from buying their dream home. Here’s WSJ again:

  By backing these loans, money managers said they would reach an underserved corner of the housing market: Borrowers who have good credit but might be self-employed or report income sporadically. In part because more Americans work that way, some money managers expect the market could increase to hundreds of billions of dollars each year, or more than 10% of the total mortgage debt outstanding.

   

  Alt-A loans gained prominence in the years leading up to the financial crisis, with lenders originating $400 billion at their peak in 2006, according to trade publication Inside Mortgage Finance.

   

  Derided as “liar loans,” they were often extended to people who had no proof of income. By February 2010, about 26% of Alt-A mortgages were 90 or more days delinquent, up from 2% three years earlier, according to CoreLogic, a real-estate data and analytics company.

   

  That compares with conventional conforming mortgages, which saw delinquencies of 7.2% in February 2010, up from 1.4% three years earlier.

   

  
  

   

  The generation of Alt-A loans has been minimal since then. Just $17 billion in Alt-A loans were originated in 2014, compared with $767 billion for conventional mortgages, according to Inside Mortgage Finance, which estimates that $18 billion to $20 billion were made in 2015.

  Some money managers are apparently making the rounds in an effort to convince mortgage companies to help get the ball rolling. Essentially, they want to act as the lender by bankrolling the loans, but aren’t too keen on bothering with the actual homebuyers and all of the paperwork. The idea then, is to partner up with mortgage firms who would theoretically take care of the administrative side of things.

  But that’s not good enough for some asset managers. Take Minneapolis-based Varde Partners, for instance. Rather than haggle with mortgage companies, the firm simply went out and bought one through which it will lend to Alt-A borrowers.

  Needless to say, this isn’t materially different from what was going on prior to the crisis even if the “Alt-A” has been given a new nickname (the “nonqualified mortgage”) in an effort to shed the stigma.

  This is still just Wall Street forcing the issue on mortgages and selling the risk to investors who are happy to go along for the ride as long as the yield is there.

  It will end in tears just as it did before, for everyone involved – especially the homeowners.

  

  

  

  

  

• Oilpocalypse Wow! Stocks, Bond Yields Plunge As Bank Risk Soars

  What The Bank of Japan gives, The Japanese Finance Ministry taketh away…

  Artist's impression of the last few days in crude, JPY, and US stocks…

   

  Oil closed under $30 after Russian productiuon and OPEC denials… From bull market to correction in 2 days – This was the worst 2-day drop in oil since January 2009…

  

   

  And today's other major driver – exploding US bank risk…

  

   

  USDJPY started to snap today as JPY and NKY erased half their post-BOJ NIRP shifts…

  

   

  But everything was awesome yesterday? US equities erased all the post-BOJ NIRP gains…

  

   

  The worst performer today was Trannies and Small Caps as even Nasdaq was hammered despite GOOG earnings hope…

  

   

  Since The Fed hiked rates, Bonds & Bullion have soared as Crude and Stocks have plunged…

  

   

  Why F.A.N.G performance diverging?  FB and GOOG both very strong sets of #s – and both are ad rev plays unlike AMZN and NFLX (both of which are underperforming).. but in the end the selling pressure was universal in high beta tech.

  

   

  As YHOO flounders around desperately…

  

   

  Sectors breakdown…

  

  • E&P weakness– APC's Al Walker on his CC seemed to be complaining, for lack of a better term, about how Moody’s and how the other rating agencies may change the methods by which they rate E&P companies.  Causing some concern today along with poor S&P 500 and WTI Mar ’16 technicals – Sisto, sector specialist

  Energy credit was a bloodbath…

  

  • Media underperforming – GOOG and FB competitors for the media ad revenues, some think the strong GOOG #s show them taking money from the media plays
  • Transports weak DAL prasm # inline, F and GM #s show Car sales continue to be very weak
  • Healthcare lower; More neg press on drug price hikes “Shkreli Not Alone in Drug Price Spikes as Skin Gel Soars 1,860%” http://washpost.bloomberg.com …VRX hit on speculation of circulation of House of Rep committee documents that mention the company specifically with regards to drug prices -ttn
  • Financials hit as US 10Y falls to multi month lows

  

   

  It's not over yet…

  

  • Utes outperformance is impressive. The group has now outperformed the S&P by 14.5% since the day of the fed hike. Flows continue to be driven by LO buyers, but todays action feels XLU driven as i'm quiet and haven't seen any meaningful prints go up

  Vroom…

  

   

  VIX started to pick up… but remains anything but panic land. It would appear that equity exposure is being reduced dfirectly rather than synthetically through a hedge…

  

   

  Many traders have noticed that volatility in the last hour of trading has increased significantly in recent weeks.

  

  CS notes that while true, we find that the increase is not isolated to the end of the day. Rather, the effect stems from an increase in overall intraday volatility levels throughout the day. The ratio of the high-low move in the last hour compared to the whole day is actually not far from the norm.  In January, the price swing in the last hour was about 40% as big as the whole day’s swing.

  Treasury yields collapsed today… 10Y at 1.85% is the lowest since April 2015…

  

   

  Today's yield plunge was the biggest drop since June 2015

  

   

  The yield curve has collapsed… 2s10s is flattest since Dec 2007!!

  

   

   

  The USDollar Index extended its losses today… very notable strength in JPY today as commodity currencies gave some recent gains back…

  

   

   

  Gold & Silver were flat today as copper and crude flailed…

  

   

  The crude oil roller coaster continues… with increasing volatility…

  

   

  Charts: Bloomberg

  

  

  

  

• Zombies

  How many "distracted" Americans are using their iGadget to ponder how a country with $200 trillion in unfunded liabilities can possibly survive?

   

  

   

  “What Orwell feared were those who would ban books. What Huxley feared was that there would be no reason to ban a book, for there would be no one who wanted to read one.

   

  Orwell feared those who would deprive us of information. Huxley feared those who would give us so much that we would be reduced to passivity and egotism.

   

  Orwell feared that the truth would be concealed from us. Huxley feared the truth would be drowned in a sea of irrelevance.

   

  Orwell feared we would become a captive culture. Huxley feared we would become a trivial culture, preoccupied with some equivalent of the feelies, the orgy porgy, and the centrifugal bumblepuppy.

   

  As Huxley remarked in Brave New World Revisited, the civil libertarians and rationalists who are ever on the alert to oppose tyranny “failed to take into account man’s almost infinite appetite for distractions.”

   

  In 1984, Orwell added, people are controlled by inflicting pain. In Brave New World, they are controlled by inflicting pleasure.

   

  In short, Orwell feared that what we fear will ruin us. Huxley feared that our desire will ruin us.”

   

  Neil Postman

  Source: The Burning Platform blog

  

  

  

  

  

• Full Summary Of Chinese Actions To Prevent An All-Out Economic Collapse

  Last summer, China unleashed an unprecedented array of measures – up to and including the arrest of “malicious short sellers” and prominent hedge fund mangers – to prevent its stock market bubble from bursting. It failed. A few months later, the chaos has spilled over from the relative containment of the capital markets and has engulfed not only the country’s FX reserves, and capital account, but also the entire economy.

  As a result, China’s government has gone all in, and as Bloomberg reports, is stepping up efforts to ward off a potential financial crisis, warning bank executives that their jobs are on the line unless they control risks and putting restrictions on an increasingly popular way of evading capital controls. These moves come in response to China’s slowest economic growth in a quarter century fueled concerns that bad debts will cripple the banking system and a catalyst for why virtually every hedge fund is now short the Yuan.

  As Bloomberg puts it politely, these actions “add to evidence that President Xi Jinping’s government is moving with increased urgency to rein in financial-system risks.”

  We disagree: these are the same panicked, “after the fact” reactions that only a government on the verge of losing control will engage in. As for their ultimate success, just compare the current price of the Shanghai Composite and its recent all time highs.

  Here is a quick summary of the Chinese actions to if not prevent, then at least delay, financial and economic collapse.

  First, in January, China aggressively stepped up measures to halt and slow down capital outflows that hit $1 trillion last year by boosting capital controls first described here last September. The tightening marked a reversal after years of easing that spurred global use of the yuan, a trend that turned on China when speculative bets against the currency offshore jumped.

  Some of the primary measures have included:

  • Increased scrutiny of transfers overseas – Some Shanghai banks have recently asked their outlets to closely check whether individuals sent money abroad by breaking up foreign-currency purchases into smaller transactions and to take punitive action if violations were discovered, according to people familiar with the matter. Each person can send $50,000 abroad annually and so large sums can be transferred by utilizing the bank accounts and quotas of a range of individuals, a tactic known as smurfing.
  • Curbing the offshore supply of yuan to make shorting costlier – The PBOC told some onshore lenders to stop offering cross-border financing to offshore counterparts late last year, and on Jan. 11 advisedsome Chinese banks’ units in Hong Kong to suspend offshore yuan lending unless necessary. It’s also widened the scope of reserve requirements to include some yuan holdings of overseas financial institutions.
  • Restricting companies’ foreign-exchange purchases – Companies can only buy overseas currencies a maximum five days before they make actual payments for goods, having previously been free to make their own decisions on timing.
  • Suspension of foreign banks – DBS Group Holdings Ltd. and Standard Chartered Plc were among overseas banks suspended from conducting some foreign-exchange business in China until the end of March. The bans included the settlement of offshore clients’ yuan transactions in the onshore market and was introduced as a widening gap between the currency’s exchange rates in Shanghai and Hong Kong encouraged arbitrage trades.
  • Outbound investment quotas frozen – China has suspended new applications under the Renminbi Qualified Domestic Institutional Investor program, which allows yuan from the mainland to be used to buy offshore securities denominated in the currency. It has also refrained from granting new quotas for residents to invest in overseas markets via its Qualified Domestic Institutional Investor program since March.
  • Delaying the Shenzhen stocks link – China originally planned to start a link between the Shenzhen market and the Hong Kong bourse last year, but the plan was delayed amid a mainland equities rout.
  • UnionPay debit-card clampdown – New measures were introduced in December to crack down on illegal China UnionPay Co. card machines, which were suspected of being used to channel funds offshore via fake transactions, most notably in Macau casinos.
  • Underground banking clampdown – China busted the nation’s biggest “underground bank,” which handled 410 billion yuan ($62 billion) of illegal foreign-exchange transactions, the official People’s Daily reported in November. The Shanghai branch of the SAFE said last week that it will crack down on illegal currency transactions, including underground banking.

  However, a recent estimate by Goldman Sachs put the total January FX interventions (and thus capital flight) at $185 billion, well above the December total and the second highest since August. This would means that whatever China has done so far has failed to stem the tide of capital outflows.

  

   

  Which explains the latest, second round of interventions. Once again, courtesy of Bloomberg, these are as follows:

  • impose restrictions on buying insurance products overseas – Moving to plug one popular way for moving money out of China, the currency regulator is imposing restrictions on buying insurance products overseas, people with knowledge of the matter said Tuesday. Purchases of insurance products overseas using UnionPay debit and credit cards will be capped at $5,000 per transaction effective Feb. 4, according to the people. Purchases of insurance policies by mainland visitors in Hong Kong reached HK$21.1 billion ($2.7 billion) last year through September, following a 64 percent surge in 2014, according to the city’s industry regulator.
  • Threaten bank chiefs with termination if targets are missed – Shang Fulin, chairman of the China Banking Regulatory Commission, told an internal meeting last month that banks would be forced to restructure, inject new capital or change their senior management if key risk indicators fall outside “reasonable ranges,” people familiar with the matter said Tuesday. Those indicators include bad-loan coverage and capital adequacy ratios, Shang told the meeting, the people said.
  • Crackdown on Wealth Management Products – China’s central bank has told lenders it will require greater control over the amount of wealth management product funds they give to brokerages and other financial institutions to manage, people familiar with the matter said Tuesday. The People’s Bank of China told banks it will also impose more limits on the amount of proprietary funds managed by other institutions, and that it will tighten control of leverage taken on when buying bonds, the people said.
  • Lower minimum required down payment for a mortgage – The central bank said Tuesday it will allow banks to cut the minimum required mortgage down payment to 20 percent from 25 percent for first-home purchases to the lowest level ever as it steps up support for the property market. A rising stockpile of unsold new homes is hampering government efforts to spur investment expanding at the slowest pace in more than five years.

  Expect many more actions and interventions over the coming months, all of which like last year, will be self-defeating as the harder China presses on its porous “capital” firewall, the more holes that will emerge.

  Ultimately, what will happen is that the “Shanghai Accord” idea, in which China announces a dramatic one-off devaluation, is implemented which is perhaps the only shock-approach that could possibly stem the capital flight even if it comes at the expense of a global deflationary wave.

  The only question is whether China will have any FX reserves left by then, and just how widespread public anger and civil discontent and disobedience will be as a result of mass layoffs and plant shutdowns as China, courtesy of mean reversion, finds itself in the same depression which its epic debt-creation engine in the period 2009-2014, and since shut down, saved the rest of the world from.

  

  

  

  

• Hillary "Flips" Off Bernie; Won Six Straight Coin Tosses In Bizarre Caucus Tiebreaker

  Hillary Clinton emerged victorious in Iowa on Monday night, but it was a close call.

  So close, in fact, that Bernie Sanders wants a recount.

  It was “a virtual tie,” Sanders said, describing the proceedings which ended with the Vermont senator being awarded 695.49 state delegate equivalents to Clinton’s 699.57. “After thorough reporting — and analysis — of results, there is no uncertainty and Secretary Clinton has clearly won the most national and state delegates,” Clinton’s Iowa campaign manager Matt Paul said in a statement.

  Sanders wants the Democratic party to release the a raw vote count, a rare move, but one he believes is necessary for full transparency.

  “I honestly don’t know what happened. I know there are some precincts that have still not reported. I can only hope and expect that the count will be honest,” he said. “I have no idea. Did we win the popular vote? I don’t know, but as much information as possible should be made available.”

  “People said we had an inferior ground game, that we didn’t have as good an understanding of the state,” Sanders’ campaign manager Jeff Weaver told reporters. “I think we certainly demonstrated that we had at least as good a ground game and I would argue that we had a better one because we started out [as underdogs].”

  Maybe so, but Sanders’ coin flip game was certainly inferior to Clinton’s and it may have cost him a delegate or two. Or three. Or five. 

  Here’s what happened in precinct 2-4 in Ames as recounted by David Schweingruber, an associate professor of sociology at Iowa State University who participated in the caucus (from The Des Moines Register):

  A total of 484 eligible caucus attendees were initially recorded at the site. But when each candidate’s preference group was counted, Clinton had 240 supporters, Sanders had 179 and Martin O’Malley had five (causing him to be declared non-viable).

   

  Those figures add up to just 424 participants, leaving 60 apparently missing. When those numbers were plugged into the formula that determines delegate allocations, Clinton received four delegates and Sanders received three — leaving one delegate unassigned.

   

  Unable to account for that numerical discrepancy and the orphan delegate it produced, the Sanders campaign challenged the results and precinct leaders called a Democratic Party hot line set up to advise on such situations.

   

  Party officials recommended they settle the dispute with a coin toss.

   

  A Clinton supporter correctly called “heads” on a quarter flipped in the air, and Clinton received a fifth delegate.

   

  Similar situations were reported elsewhere, including at a precinct in Des Moines, atanother precinct in Des Moines, in Newton, in West Branch  and in Davenport. In all five situations, Clinton won the toss.

  When all was said and done, Clinton won six consecutive coin tosses which shouldn’t come as a surprise. Clinton’s pretty lucky when it comes to beating the odds as her cattle futures trading record makes abundantly clear.

  “In another race, those heads-or-tails contests may not have mattered,” The Washington Post wrote this morning. “But, early Tuesday, Clinton was ahead of Sanders in Iowa by just four “state delegate equivalents,” [and] given that slim margin and the unknown intentions of Martin O’Malley’s eight SDEs now that the former Maryland governor has suspended his presidential campaign, those coin flips are looking mighty significant.”

  Here’s the absurdity caught on film as incredulous and visibly exasperated caucus goers flip for delegates.

  There you have it. Efficient democratic procedures on full display in Iowa.

  If that wasn’t exciting enough for you, here’s another flip clip:

  No lie: Coin flip broke tie, gave @HillaryClinton a delegate at #IowaCaucus pic.twitter.com/PAoKslCJiV via @FernandoPeinado

  — David Beard (@dabeard) February 2, 2016

  It’s no wonder Sanders wants to see the raw vote. Here’s another account from Davenport courtesy of The Washington Post:

  In Davenport, another precinct tied 84-84. It was time for someone to stretch out that thumb.

   

  “Bernie’s side has called heads,” the coin tosser said, as documented in Davenport in a video posted by Robert Schule. As if to lend the proceedings an official air, she further explained the procedure: “I’m going to let the coin hit the floor.”

   

  Gravity, of course, wins every caucus — the coin fell to Earth as expected. “No one touch it!” someone shouted. Tails again! Cheers erupted from the Clinton camp — and heads proved a loser for Sanders once more.

  At the end of the day we suppose there’s a bit of symbolism here. Establishment politician or “protest” candidate, most Americans doubt any real change is coming to Washington in 2016 regardless of who prevails in the national election.

  In that sense, it’s all one big coin flip anyway.

  

  

  

  

  

• What's The Next 'Energy' Sector In Credit Markets? UBS Answers

  Lately UBS, which just announced its latest ugly quarter in which the ultra-wealthy client dependent bank saw $3.3 billion in outflows from its all important wealth-management business, has been increasingly dour on the future, whether it is warning to “Buy Gold” As Equities “Rolling Over” or explaining “How The Investment Grade Dominos Will Fall.” Today, UBS’ chief global credit strategist Matthew Mish takes on the pleasant topic of predicting what the next imploding “energy-like” sector in credit markets, which is particularly relevant after today’s historic downgrade of several energy names which until last year seemed unshakable.

  Here is his response:

  What’s the next ‘energy’ sector in credit markets?

  Our recent conversations have led to investors’ increasingly scrutinizing our world view, demanding to better understand the risks inherent in the US corporate and broader credit markets; i.e., proverbially what is the next ‘energy sector‘. While that question is indeed challenging, we’ll do our best to paint a straightforward answer. To reiterate, our focus in this piece is on US corporate credit and, more broadly, US credit conditions; we will not discuss dynamics outside our own borders. And it is indeed possible that there may not be another ‘energy’ story, but rather a series of smaller episodic stresses that play out across credit segments.

  The hallmarks of most asset price booms and busts are grounded in irrational and aggressive future return expectations, which fuel a significant easing of lending standards and debt growth followed by a reversal of both conditions. Historically, one clear harbinger of future stresses has been debt growth. Those industries with the most aggressive credit growth in prior cycles (e.g., telecommunications in the ’90s, finance and autos in the 00’s, Figure 1) tend to ultimately cause the most pain for investors. Some would say this is an obvious and inherent flaw in the structure of corporate debt markets; that is to say those sectors that issue the most debt naturally grow larger in benchmark HY funds, and ultimately – when the credit regime turns – their investors have too much exposure to industries and issuers with substantial gearing. The result is a lower risk appetite, tighter lending conditions and deleveraging. But such is the largely indexed world we live in.

  We believe the lower quality (e.g., triple C) segment of the US HY market fits this thesis to a ‘T’, and remains a unique risk in this cycle given the factors of Fed QE and regulation. However, some would argue this sector has re-priced considerably and liquidity is challenging to manoeuvre positions (i.e., it’s too late).

  The other areas we will highlight have not re-priced to the same extent, so the risk is we are early (or simply wrong) – but this thesis is what many investors are seeking. In US high yield, excluding energy E&P the next largest industries experiencing debt growth in this cycle are technology and cable. In US leveraged loans, we have seen a similar trend in technology specifically. However, in both cases the relative growth is not as extreme as that witnessed in energy. In US high grade, the picture changes with outliers excluding gas pipelines in the REIT and pharmaceutical industries.

  The latest Fed SLOOS offers some key insights in this regard. First, banks indicated that their lending standards for commercial real estate (CRE) loans of all types tightened in Q4, with significant fractions reporting tightening in multifamily (MF) and moderate fractions reporting tightening for construction/land development (CLD) loans. Second, banks were asked about longer term expectations for lending conditions through 2016: significant fractions of banks stated they expect to tighten lending standards on MF and CLD loans, while a moderate fraction expected tightening on nonfarm nonresidential (NFNR) loans. And third, on the outlook for loan performance in 2016, a significant fraction reported that they expect rising delinquencies and charge-offs for all categories of C&I loans.

  In short, while there may not be another ‘energy’ sector this cycle, our proverbial list of candidates includes lower quality high yield (ex-commodities) and commercial real estate (CRE). More broadly, the OCC’s own examiners would also likely add asset-backed and auto loans to the list. The stark conclusions these credit officers draw with respect to the massive easing of credit standards due to competitive pressures seems clear enough – but unfortunately they seem to largely fall on deaf ears.

  

  

  

  

  

  

• An Escalator Of Optimism

  Submitted by Salil Mehta via Statistical Ideas blog,

  The current stock market level is disconcertingly well below not just the Wall Street forecasts for 2016 (made a couple months ago), but also below those made for 2015… or for even 2014!  One can see our recently tabulated list (the lengthiest available ever) of market calls, which was recently enjoyed by leaders such as billionaire Vinod Khosla, and economist Noah Smith.  One doesn’t need a Harvard PhD to grasp the chart below for 10 Wall Street soothsayers, consistently giving their views to Barron’s (and anyone else) in each of the past few years.

  

   

  Even as we proved the flagrantly poor performance of these “forecasters” (not just relative to the market but -depressingly- even relative to a fair coin toss), it’s worth noting that the recent stock market level of just <1900 is below all 10 out of 10 2016 forecasts (e.g., Federated is the highest at 2500, or we would need a 32% rise in just 11 months remaining in 2016 to make that target!)  It is also below all 10 out of 10 2014 forecasts (e.g., Federated is again the highest at 2100, or we would need an 11% rise to make that 2014 target.)  In a period of increased suicides among economically stressed men (here, here), let’s not push bogus hope.

  As for the most bull of bullish forecasters, it is intriguing that 5 of the 10 forecasters have always had and an upper-half forecast in each of the past 3 years.  They are sequenced here in approximate order of bullishness (most bullish first): Federated Investors, J.P. Morgan, Prudential, Bank of America, and Columbia.  It seems as if these most imaginative firms have much to learn about their prognostication errors and risk.

  Assuming they will throw in the towel and bring their buoyant forecasts back to norm, this is not the first time strategists have done so quickly in the New Year.  Even as recently as 2014, we analyzed how year-end forecasts have ineptly come down in the first-month, even as their unknowing outlooks are disproportionately subject to final-month risk.  We will publish an article in an external publication later in February, concerning ideas about what investors can do now, given this wild gap, between optimism and intelligence.

  

  

  

  

  

• New Petition Seeks Appointment Of Special Prosecutor Over Hillary Clinton Email Coverup

  With Hillary beating a self-proclaimed socialist running on a "raise taxes" platform in Iowa thanks to six coin tosses, one wonders if reality is sinking in among the great unwashed American citizenry that she may not be as 'trustworthy' as mainstream media proclaims her to be.

  As the email controversy just won't go away, and with insiders confessing that FBI individuals will "revolt" should a case against Hillary not be brought over her "top secret" personal email server debacle, it appears "we the people" are taking matters into our own hands.

  

   

  American's have the right to full disclosure regarding Hillary Clinton's distribution of Top Secret and Classified Emails on and illegal Email server. Our Government must ensuring voters are well informed during the 2016 Presidential electoral process. Stop the stonewalling on a likely cover-up that may prove a bigger scandal than Watergate. End the partisian equivocation, ensure a truly independent special prosecutor is appointed immediately .

  "If men were angels, no government would be necessary. In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself" – James Madison, 1788

  *  *  *

  As we previously noted, the implications are tough for The DoJ – if they indict they crush their own candidate's chances of the Presidency, if they do not – someone will leak the details and the FBI will revolt… The leaking of the Clinton emails has been compared to as the next “Watergate” by former U.S. Attorney Joe DiGenova this week, if current FBI investigations don’t proceed in an appropriate manner. The revelation comes after more emails from Hilary Clinton’s personal email have come to light.

  “[The investigation has reached] a critical mass,” DiGenova told radio host Laura Ingraham when discussing the FBI’s still pending investigation. Though Clinton is still yet to be charged with any crime, DiGenova advised on Tuesday that changes may be on the horizon. The mishandling over the classified intelligence may lead to an imminent indictment, with DiGenova suggesting it may come to a head within 60 days.

  “I believe that the evidence that the FBI is compiling will be so compelling that, unless [Lynch] agrees to the charges, there will be a massive revolt inside the FBI, which she will not be able to survive as an attorney general,” he said.

   

  "The intelligence community will not stand for that. They will fight for indictment and they are already in the process of gearing themselves to basically revolt if she refuses to bring charges."

  The FBI also is looking into Clinton's email setup, but has said nothing about the nature of its probe. Independent experts say it is highly unlikely that Clinton will be charged with wrongdoing, based on the limited details that have surfaced up to now and the lack of indications that she intended to break any laws.

  "What I would hope comes out of all of this is a bit of humility" and an acknowledgement from Clinton that "I made some serious mistakes," said Bradley Moss, a Washington lawyer who regularly handles security clearance matters.

  Legal questions aside, it's the potential political costs that are probably of more immediate concern for Clinton. She has struggled in surveys measuring her perceived trustworthiness and an active federal investigation, especially one buoyed by evidence that top secret material coursed through her account, could negate one of her main selling points for becoming commander in chief: Her national security resume.

  

  

  

  

  

• Chipotle Served With Fresh Criminal Subpoena For Serving e.Coli Burritos

  Everyone expected that Chipotle’s results would be bad, and they were with the company missing revenue expectations of $1.01 billion with $997.5 million in sales, on $2.17 in EPS. But what has drawn everyone’s attention in the company’s just announced quarter is that following the previously announced criminal investigation for serving e.Coli tainted food,on January 28 it received yet another, new criminal investigation, one which broadens the scope of the previous one.

  On January 28, 2016, Chipotle was served with a subpoena broadening the scope of the previously-announced criminal investigation by the U.S. Attorney’s office for the Central District of California. The new subpoena requires us to produce documents and information related to company-wide food safety matters dating back to January 1, 2013, and supersedes the subpoena served in December 2015 that was limited to a single Chipotle restaurant in Simi Valley, California. We intend to fully cooperate in the investigation.

  For now the stock appears to be doing its best to, well, hold it in…

  

  

  

  

  

  

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